People who need financial assistance immediately have become more likely to turn to payday loans. These short-term small loans, also known as cash advances or paycheck advances, provide borrowers with a convenient way to access quick cash to cover unexpected expenses or bridge the gap until their next paycheck.
The money you get from a payday loan can be used to pay rent, bills, or just for some extra spending money.
Keep reading to learn more about:
- What has caused payday loans to have a bad reputation
- Why a payday loan might be a good option for you
- A comparison of high-cost and low-cost lenders
- Getting a loan when you have bad credit
- The amount you can borrow from a payday loan
Why do payday loans get a bad rap?
It’s no secret that payday loans often get a bad reputation. Payday lenders are infamous for exploiting people in vulnerable financial circumstances. Predatory lenders have historically lent money to people who could not repay the loan, charging interest and fees up to 400% of the original loan amount.
In 2018, it was reported that an Auckland man paid $40,000 over four years to pay off just $900 in debt. The man was trapped in a vicious cycle of debt due to the lender’s extremely high interest rates and penalties.
A recent law change in New Zealand attempts to curb this behavior by capping interest and fees at 100% of the original loan amount. Under this law, he would have had to repay no more than $1,800 if he had taken out a loan then.
Although this is better, there are still high-cost lenders out there. If a lender charges more than 50% interest per year, it is considered a high-cost lender. In order to avoid this, many payday lenders charge 49.5% interest rates.
What are the benefits of using a payday lender?
While payday loans sometimes have a bad reputation, they do offer some benefits. Due to its short term, payday loans are different from other types of loans. Payday loans typically last a few weeks – just long enough to get you through until your next paycheck arrives.
A bank or finance company’s personal loan usually has a minimum term of six months. If you just want a small loan to cover some urgent expenses, you might not want to take out a longer term loan for more than what you need. Borrowing from a payday lender is also generally easier: because they tend to be small loans, you can often get a payday loan even if you have a poor credit history (more on that below).
However, while it’s easier to get a payday loan than a loan through a bank or finance company, their higher interest rates mean payday loans should only be a last resort. They should only be used to cover unexpected expenses, not as a long-term solution.
Can I get a payday loan if I have bad credit?
If you have bad credit, you still may be able to get a loan. The most important thing is affordability: if you earn enough income to afford the loan repayments, you are more likely to succeed in getting a loan. This is true even if you had a bad credit history. Lenders will look at your income, credit rating, and debt-to-income ratio to determine if you are able to afford the repayments. It is important that you are honest in your application and provide accurate information. Finally, it is important to shop around and compare different lenders to get the best rate.
Can I get a loan with no credit check?
If you have bad credit history, you may be searching for “no credit check” or “bad credit” loans. It may be tempting to hide your credit history from a potential lender, but there’s really no need to do this. Any responsible lender will do a credit check to learn about your financial history. That doesn’t count you out from getting a loan: as long as you can afford the loan repayments, you might still be able to borrow money.