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How do Payday Loans Actually Work?

Payday loans – you’ll either have no clue what they’re all about, or you’ll have heard a huge amount of controversy in the media about whether or not they should be used. Regardless of what your opinion on them is, payday loans are an ongoing money loaning industry – but do you actually know how they work? A lot of people will tend to have a strong opinion on this type of short term loan, based solely on what they’ve read, or what they’ve been told, but won’t actually know what the process behind them is, and how a reliable payday loan company actually operates. If this sounds all too familiar and you’re curious about the ins and outs – here is how payday loans actually work.

The Payday Loan Process

Generally speaking, payday loans are a short term loan taken out with the intention of repaying the borrowed amount by the next payday. If you’re interested in applying for online payday loans Canada, then here is a little bit more information on the overall process:

  1. Payday loans tend to be for a smaller amount of cash – and in most states there does tend to be a cap on how much you can take out.
  2. Unlike normal bank loans that can be paid back in instalments, with payday loans this simply isn’t the case. The whole idea is that they’re to be paid back in a singular instalment. They’re not long term – they’re short term.
  3. As previously mentioned, they’re supposed to be paid back on the next payday – or at the very least on the agreed day between you and the lender.
  4. One of the main reasons that payday loans are so popular and commonly used, is that they don’t assess your credit rating. This means that people with bad credit can take out a payday loan.
  5. Generally speaking, they’re an automatic repayment sort of situation – which means you sign something which says the lender can take the cash out of your account on the signed day. Although it is possible to rollover the cash, this isn’t advised because it can be the beginning of getting stuck in a spiral of debt. This is in inevitable risk that comes with the ease of applying for and taking out payday loans, but so long as you do it sensible and only pay what you can afford, then there shouldn’t be an issue.

Why Might Someone Want to Take Out a Payday Loan?

There are plenty of reasons why someone might want to take a payday loan out. Here are just a few of the reasons why:

  1. There’s been an emergency, and you’re short of money just before payday. Think about it – things can break at any moment. It might be a household appliance, your car, or even your laptop – but so long as it’s something that you can’t be without, you’re going to have to fork out for the repairs if you don’t have the appropriate insurance. As most of these things seem to happen at the worst possible moment – when we’re running low on cash towards the end of the month – a payday loan can be the easiest solution. It means you don’t have to go through the bank, you can have the cash almost immediately, and if you get your pay cheque next week, you’ll be able to pay it off immediately. Simple as that.
  2. You might have a poor credit score, and need to take out a loan. People often associate poor credit scores with carelessness and reckless spending – but the truth is that just about anyone can end up with a negative credit rating. All it takes is one missed or late payment, and immediately you’re on the record as having a bad credit score. This means that the vast majority of banks and lenders are going to reject the application for a loan, and therefore a payday loan could be the only option.

Basically any situation where you may need a burst of money that you can pay back in a short amount of time, tends to be the time that people look into payday loans. So long as you research accordingly, read the small print, make sure you lend from well reputed companies and can definitely pay back the money you’ve borrowed by the date specified, they shouldn’t cause any harm. As with any finances, you should exercise caution, and treat it with respect. Only when it’s mishandled does it become an issue.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.

By Sheena Jordan
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