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Payday loans will provide you with the quick cash that you need. But first, before running out to apply for a payday loan, try to acquire a basic understanding of what such loans are all about. This will enable you to use the loans wisely to your own benefit.
Understand the differences between a traditional loan and a payday loan. A payday loan is essentially a small loan (generally less than $5,000). The loan amount is dependent on your monthly salary. As such loans are not huge amounts, you don’t have to worry about messy paperwork or credit rating.
From the lender’s perspective, a payday loan is a very small sum of money (compare a $5,000 loan with a mortgage loan). That means the risk involved is relatively small. Lenders have found that when the loans are small, the default rate is very low. In other words, most borrowers tend to return the money very quickly. Hence, lenders can afford to approve such loans very quickly.
The industry is so competitive that you can have your loan approved and the money will be credited to your bank account in just one business day.
Of course, the lender’s assumption is that you will repay the loan promptly, upon receiving your pay check. That’s why such loans are known as payday loans. They are also termed as payday advances because such loans are meant to fill a gap – that is, the gap between your immediate need for cash and your actual pay day.
When the loan is repaid in full, the lender walks away with a small sum of money (take it as interest for providing the loan), and everyone is happy. But if the borrower fails to repay the loan on time, a very heavy interest rate is applied to the loan. This high rate of interest is meant to act as a strong deterrent to discourage borrowers from delaying or defaulting on payments.
When you take up a payday loan, please ponder over your decision carefully. Do you really need the money? Your reason must be very strong for you to fill up an application. In addition, you must have the confidence to repay the loan on time. Otherwise you end up with a loan that can never be fully repaid due to the high interest rates.
For example, you may need the money for a down payment when you are making a big ticket purchase. Your big ticket purchase can be a car or even a house. If you delay in paying in the down payment, the house or car may be gone. You know that your pay check is coming in a couple of weeks time. So you take up a payday loan just to settle the down payment.