As the name implies, payday loans are designed to help tide workers over from one payday to the next. Many people use this loan type as a source of quick cash, and as a way to pay bills that would otherwise be late or go unpaid altogether. Payday lenders are located throughout the country, and many towns have more than one provider of these short-term financial vehicles. Understanding what payday loans are and for whom they are most appropriate is important, especially if you are thinking about taking out such a loan yourself.
How They Work
Payday loans are different from other types of loans in that they are typically made for only a short period of time. When you take out a car loan, you could be paying it off over three, four or even five or more years. But when you take out a payday loan, you will typically be paying the loan off in a matter of weeks.
The short-term nature of a payday loan can make it quite valuable, but it also means that the interest rate can be quite steep on an annual basis. When you take out a loan, you will typically be given a due date and an amount. In exchange, you receive cash up front, and you pay back a higher amount in a week or two. Many workers use such loans when hey find themselves short of cash, then pay back the money when they receive their next paycheck.
When is a Payday Loan Appropriate
Just about everyone has found themselves short of funds with payday still a week away. When that happens, a payday loan can be a good choice, particularly if you have bills to pay.
For instance, it can make a lot of sense to use a payday loan to pay a credit card bill on time, since the late fees and other charges may be more than the cost of the payday loan. It can also make sense to use a payday loan to make your mortgage or car payment, since paying late can adversely impact your credit score.
These loans can be very valuable, particularly for low income workers who find that they run out of cash before your pay arrives. The key is to weigh the costs of the loan against the costs of paying a bill late or damaging your credit.