Understanding the Nature of a Payday Loan
Payday loans are a form of short-term financing. As the name implies, you are expected to repay the loan plus interest soon after receiving the financing. In order to receive the loan, you submit an application for the amount of money you need to borrow. The lender evaluates the information, does some quick checking, and makes a decision.
Assuming you are approved, the money is provided quickly. As part of the deal, you commit to repaying the full amount due within the time frame cited in the loan contract. Typically, lenders will allow at least two weeks for you to repay the balance. In some cases, the lender may extend terms that are a month or even a couple of months. In any event, you’ll know the term before signing the loan contract.
Qualifying for a Payday Loan
The qualifications for obtaining a payday loan may vary slightly from one lender to the next. You will have to provide proof of steady income that amounts to at least the monthly minimum required by the lender. That may be in the form of a paycheck stub or it could be monthly disbursements from a settlement, child support or alimony, or any other source of income that the lender can verify.
Along with confirming that you have the means to repay the debt on time, the lender will want to verify that you have an active checking account and a permanent residence. Be prepared to provide proof of your identity as well.
Some lenders will require additional information. Don’t worry about overlooking something; the lender will provide a breakdown of every bit of data needed to process the application.
Bad Credit Does Not Mean an Automatic Denial
One of the advantages of payday loans is that lenders are often willing to work with people who have less than perfect credit. The fact that your credit score is too low for the bank to extend a short-term loan doesn’t matter. As long as you meet the basic qualifications that the payday loan lender has in place, you have a good chance of being approved.
The Review Process is Short
Another benefit of applying for a payday loan is that it doesn’t take days to get a response. Some lenders are able to complete the review in less than an hour. That means you will have an answer the same day that you submit the application.
This is true whether you apply in person or choose to submit an application online. In both scenarios, lenders tend to move quickly. If any additional information is needed, you’ll receive that request shortly after submitting the application.
Money is Received Quickly
Assuming the loan is approved, the lender will go over the terms and conditions with you, answer any questions that are on your mind, and provide the documents for you to sign. Once that’s done, the money is provided in cash. If you applied online, the funds are transferred into your checking account.
No Restrictions on How You Use the Money
Payday loans are considered to be unrestricted loans. That simply means you can use the money any way that you see fit. Whether it’s to cover the cost of auto repairs, pay off medical bills, or pay off some other obligation that’s pending, it’s all up to you. The lender is only interested in your ability to repay the borrowed money plus interest by the due date.
How Payday Loans Compare to Other Forms of Short Term Financing
Many payday loan lenders present the interest in the form of an APR. At first glance, it can seem to be daunting. While it is higher than the typical rate, keep in mind that what you end up repaying is often less than what you would pay by using a credit card and then paying off the balance over several months. It’s also often less expensive than choosing to pay pressing debts late and incurring significant late fees and other penalties. In this sense, opting for a payday loan may be the most cost-effective solution.
Payday Loans Can Help You Protect Your Credit Score
It’s true that lenders of payday loans rarely if ever report payment activity to the major credit bureaus. From that perspective, this type of loan will not help you improve your credit score. However, it can protect your present score.
The most important benefit to your credit score is that other creditors do not end up submitting negative information to the credit bureaus. Since you used the money from the payday loan to settle the debts on or before their due dates, those creditors will report that you honored those obligations on time.
Be mindful of the fact that many lenders, including payday loan lenders, may initiate what’s known as a hard credit inquiry. That could temporarily lower your credit score by a few points. When you approach the lender, do ask they will pull a hard credit inquiry. That will help you decide if you want to continue with preparing an application, or if you want to look for a lender who will not pull this type of inquiry.
Remember that your goal is to obtain the financing needed to take care of a pressing obligation. Feel free to ask questions and weigh the responses before making any type of commitment. As long as you understand what to expect and the nature of the obligation that you’re taking on, get the money and pay off the debt on time. Doing so will make it all the easier to know where to turn if the need for another loan arises in the future.