You may have heard of payday loans as a potential option for borrowing when you’re low on dough. There are thousands of these companies both in physical locations, and all over the internet as well.
How do payday loans work? Below are the five must-know things to remember:
1. The concept
Payday loans are designed around the understanding that sometimes you’re just a bit short when it comes to paying bills a few days before payday. Or maybe you have a big unexpected expense — your home has flooded, your car has broken down, or your pet is sick.
Payday loans work by providing short-term, small or medium sized loans to individuals. Loan repayment options vary, but can be a couple weeks to two or three months depending on the company and the situation.
2. How they make money
Payday loans are a business, so borrowing from them has to make money somehow. To do this, payday loans charge a set fee based on how much you borrow. The fee may vary depending on how long it will be until you expect to pay the loan back.
When borrowing a payday loan, you should expect to pay at least 10 per cent of the loan on top of the loan repayment, although this does change depending on the company you choose. If you are unable to pay your loan back on time, you will also have to pay interest on the loan, and because these loans are unsecured and pretty high risk for the company, your interest rates will be on the high side.
3. What you need
Most payday loans try to make it pretty easy to borrow money. They know that if you are turning to them, you need cash fast, and are probably stressed out. You can’t afford to spend time slaving over forms and questionnaires, credit checks, and approvals. You’ll usually have to present a form of ID, like your driver’s license, health card (only applicable in some provinces), or Canadian passport.
You also need to have an active bank account, usually one that has been open for at least 90 days. Finally, you need to have a consistent source of income. This ensures the payday loan company that you will probably be able to pay the loan back.
4. What they need from you
Most of the information the company is going to need from you is pretty basic — your name, age, birth date, address, and phone number. Each company is different in how much they ask from you, some require the bare minimum of information to get you your money, while others ask a variety of other questions about your credit score and credit history, your plans for the loan, and other questions that help them to flesh out your profile.
5. Paying back and borrowing again
Some companies will allow you to continue to pay back an old loan, while taking out a new loan. As long as you have made payments on the previous loan already, and are actively paying it down, it is sometimes possible to do this. If it is necessary for you, it is better to do something like this than to default on the old loan.
If no payments are made on the loan, it will go to a collections agency, which will cost you a lot more in the long run. That said, if you are struggling in a payday loan loop, it is best to borrow as little money as possible from them, and to maybe seek out a different form of loan or borrowing option while you sort out your file with the payday loan.