No credit checks and no collateral make easier to get a payday loans signed off on, but the easiest option is not always best. Payday loans are an easy source to borrow money when your credit rating is not up to the par. Instant cash disbursal and lump sum payment within a two-week period make it seem manageable, but the fact is more than 80% of people fall prey to these loans.
Lenders charge high interest rates due to poor credit rating. It can be difficult to pay off the loan within two weeks if you are living from paycheque to paycheque. Before you take out payday loans, you need to understand that they are not available to be used all the time. Paying back a loan can be more expensive if you make a default. With each default, late payment fees and interest penalties will add up, which means continuous rise in the size of the loan.
Here are some important factors you need to know about payday loans.
How much money you can afford
You must remember that you will pay interest along with what you owe. The cost of your payday loan is the interest you pay on top of the principal, which is likely to go up with each rollover.
Most of the people borrow what they need, for instance, if savings fall short of £200, you will likely apply for £200, but this approach is completely wrong. If you borrow £200 for a period of 14 days, you will pay back £222.4 in total. In other words, you will pay back £11.2 for every £100.
It seems very affordable, but chances are you fail to pay back the loan. If you loan becomes overdue by 30 days, you will have to pay £289, which will go up to £340.60 after 60 days.
Now you can understand the importance of affordability. Falling short of £200 does not mean that you should borrow this much money. You should use online calculators to know the total cost of your loan to see whether you will be able to pay back this money after meeting all of your regular expenses.
Peruse terms and conditions
As you sign the loan agreement, you abide by all terms and conditions. Each lender follows different policy and hence processing fees, prepayment penalty and late payment fees can vary from lender to lender.
It is important that you read all terms and conditions carefully before signing the agreement. If you have a doubt, you should immediately ask the lender.
Lenders often do not disclose about hidden fees. Make sure that you know all fees that lenders will charge during the disbursal of money and when you make a default.
Evaluate the risk
If you do not carefully evaluate the risk at the time of taking out a payday loan, it may catch up with you later. One of the biggest mistakes borrowers commit at the time of taking out such loans is they fail to evaluate the risk involved.
You will end up paying high interest rates in case of bad credit. The APR of these loans can go from 371% to 521%. It includes interest rates plus fees.
These loans are considered risky because late payment fees quickly add up. Your lender may charge up to 15% fees on every default. When you find out the total cost of the loan, calculate how it quickly adds up with each default.
Compare interest rates
Payday loans are undoubtedly more expensive than other small loans, but some lenders offer such loans at affordable interest rates. Before you grab any offer, make sure that you have compared interest rates. The lower the interest rate, the better it is. It is advisable that you research in advance before an emergency pops up.
The final word
Payday loans may prove very costly if you do not take into account your affordability. When you apply for these loans, the most important factor you need to consider is your affordability. This may prevent you from falling into a predatory cycle of debt. Financial experts suggest that you should compare interest rates, go through all terms and conditions and above all have a repayment plan.