What Is a Payday Loan?

When you’re responsible for your own finances, you become well-aware that it’s not always a bed of roses and that some hiccups are bound to happen. In some cases, a quick fix like a payday loan may be a good solution. However, be cautious when pursuing those, as their repercussions could be a lot worse than unmet financial responsibilities.

In this article, I’ll explain in detail what a payday loan is, when you should consider one, and when you should avoid it like the plague. Let’s delve into it.

What Is a Payday Loan Exactly?

The payday loan definition is when you borrow money for a short period with high-interest credit, which increases with the increase of the amount borrowed, which depends on your credit profile and income.

The idea behind them is charging very high-interest rates for instantaneous, short-term credit. Payday loans are also known as check advance loans and cash advance loans. What is an unsecured loan? Find out about unsecured loans here.

Payday loans are categorized into two: Small Amount Credit Contracts (SACC) and Medium Amount Credit Contracts (MACC).

  • SACC: Unsecured loans for $2,000 (or less) over the course of at least 16 days and no more than a year.
  • MACC: Loans between $2,001 and $5,000 with a maximum interest of 48% p.a. and with a possible establishment fee of $400. The duration must be under 2 years.

Tip: Steer clear of “Business purpose loans” and “Non-consumer credit regulated loans” and the interest charged on them doesn’t have a ceiling. Learn how to calculate loan here.

What Are the Steps of Applying to a Payday Loan?

payday loan services

Application is quite simple; all a borrower has to do is answer some questions that the lender poses regarding the borrower’s income sources, credit profile, and job status. According to these factors, a lender would decide the loan amount they see appropriate.

They’re also liable to ask about your bank account statements, proof of income, whether you’re committed to other loans with a paid default, and for details regarding your living expenses. Can you get a second payday loan? Find out about second payday loans here.

Bear in mind, however, that some lenders ask for access to the borrower’s bank account or submission of a post-dated cheque equal to the amount borrowed. This also includes a finance fee that is added after the upcoming pay date. Get a loan today from Perfect Payday, begin your loan approval process now by clicking to apply.

If the payday lender is not asking for this information, it is likely they are not complying with their obligations under the law.

What Is the Difference Between a Payday Loan and a Personal Loan?

payday loans definition

There are two major aspects that set apart a payday loan and a personal one, and these are as follows:

  1. Rates relative to time: If you apply for a personal loan, the amount of interest you get charged can only go down with time as your outstanding loan amount decreases. However, the interest increases if you’re on a payday loan.
  2. Fees and Interest: A payday lender can charge an establishment fee amounting to 20% of the money they lent as well as a monthly fee amounting to 4%. 
  3. Charges: A payday lender has the authority to add plenty of charges that do not apply to personal loans as the latter come with fixed ones, and can be secured by personal items. Can you get a loan at 17? Find out here.

What Are the Advantages of a Payday Loan?

It’s quite obvious that payday loans are a bit risky and might pull someone into crippling debt if they don’t manage them wisely, so why would people choose them?

1. They’re very easy to access

You can secure your loan through payday loan services online or through the phone, with some lenders giving you access to the cash within 24 hours. As opposed to traditional loans, their application and process practically do not require any time and can be done on a whim.

2. There aren’t as many restrictions

payday loan definition

Whereas a regular loan requires a lot of paperwork and often has plenty of restrictions to limit problems, a payday loan doesn’t. All a payday lender needs is your bank statement and ID to make sure you’re over the legal age, and proof that you have a job or regular source of income. Learn how to work out interest on loan here.

3. No credit checks

Due to a wrong purchase decision or a hiccup in finances, some of us may have credit scores that aren’t to boast about, which could be a huge obstacle when it comes to getting a traditional loan. How to choose a suitable loan? Learn about finding a suitable loan here.

However, with payday loans, you don’t need to have a good credit score for approval, and the lender typically doesn’t check your credit history. This is also why payday loans won’t contribute to building your credit for future benefits and purposes.

4. Unsecured

Contrarily to auto loans, mortgages, and car title loans, you don’t have to use personal property to secure your approved loan. So, if you default (fail to pay), the lender doesn’t have the right to seize your personal property. What is defaulting on loans? Learn more about loan defaults here.

However, this is why their interest is insane and can grow exponentially. And don’t forget, a lot of lenders ask for access to your bank account, which is a different type of risk, but still as dangerous.

Are There Any Repercussions to Payday Loans?

With all that I’ve mentioned, it’s probably not surprising to you that payday loans are quite risky and could have some terrible consequences. So, before you apply for one, make sure you can avoid these repercussions. How long to repay loan? Discover how long it takes to repay your loan here.

1. Their cost

To start it off, payday loans come with an establishment fee of 20% of the amount, 4% monthly account keeping fee, up to 200% default fees or charges, as well as variable government fees and enforcement expenses. The latter applies if the lender resorts to court in the case that you default, and there’s no cap on it.

 

Also, according to the entity that you borrow from, you could get a total interest rate p.a. that is up to 1.75%, a base interest p.a. up to 1.20%, and a bonus interest rate p.a. up to 1.45% (4 months).

 

You should also bear in mind that the interest only increases, and with it, the total outstanding amount, so it becomes a loop of debt that could become very hard to break out of. So, before you venture into this, make sure that you can cover it. Learn how to apply for a loan here.

2. They’re a tool for loan sharks (predatory)

what are payday loans

Loan sharks rely on the fact that you’re in desperate need of money and your inability to attain it from traditional sources. This is why they put a little restriction on their loans but also impose extremely high interest.

Also, if none of the transactions is reported to Equifax (formerly known as Veda) or Experian, the credit reporting bodies, then the lender probably doesn’t care about whether you can pay your debt back in the first place, and that’s a huge sign of their intention to accumulate interest and use it against you.

3. Lenders have access to your bank account and can sue you

Giving someone access to your bank account in no way, shape, or form seems like a good idea. But, some payday lenders require access to your bank account as a guarantee that they’ll be getting back their money.

In the case that they don’t, they have the right to sue you for the money you owe them, and consequently to bring you into court.

Final Thoughts

Now that you’ve learned all there is to know about payday loans, it’s really important to ask yourself if you’re going to be getting enough money to pay the debt off, and that you’ll be getting it extremely soon. Otherwise, you should look into alternative options and play it safe. Learn how to pay off loan here.

About the Author

Lucy has over a decade of experience in finance. She is currently the content curator here at Perfect Payday.

View All Posts