Recently updated on November 24th, 2022 at 07:21 pm
If you’re in a bind, there are many financing options that you can consider, and one of them is online payday loans. Payday loans are great if you’re in a pinch financially because not only are they easy to acquire, they’re also cheap and fast.
But what are payday loans, and how do they operate?
What are Payday Loans?
A payday loan is a loan you can borrow from a lender and has an interest that depends on your income. Its principal is usually a significant percentage of your next salary.
But how do they work? Payday loans offer immediate financial help with high interest and don’t require collateral. This is because they are an unsecured loan. Of course, unsecured loans are a risk for lenders, but they mitigate this by issuing payday loans with high interest.
That said, if you’re not sure that you can pay off a payday loan, you might want to avoid them since they can snowball into a big debt if not handled properly.
Payday loans are usually meant to be paid in full when you get your next salary. Because of this, the interest is usually fixed. Some lenders don’t even call them interests; instead, they call them flat fees ranging from $10 to $100, depending on how much you borrowed.
If you’re wondering, payday loans aren’t usually reported to credit bureaus, but once the loan is passed to the collectors, the payday loan may be filed. With that in mind, if you fail to pay up the loan, it can affect your credit score. Of course, if you pay it in full in due time, it won’t affect your credit score.
Now that we know what a payday loan is and how it works, here are some alternatives you might consider if you don’t want to get a payday loan.
1. Bad Credit Loans
Bad credit loans are a different kind of personal loan that are offered to individuals with a poor credit score or just starting out their credit. Borrowers usually use this type of loan in emergencies such as medical bills, car repair, and others.
You may think that a traditional loan can still cover these emergencies, but you have to remember that bad credit loans are meant to be offered to people who have a credit score that’s not high enough for them to get a traditional personal loan.
Many financial institutions require a good or excellent credit score — a FICO score that’s 670 or higher — for an individual to qualify for a traditional loan. When we say traditional loan, we mean lower interest rate and better repayment terms. But in the case of a bad credit loan, the interest rate is much higher, and the lender will require rigorous repayment terms.
2. Credit Union Loans
Getting a credit union loan is a good option if you need to borrow money with better repayment terms. Generally, credit union loans can offer lower interest rates and fees, and they are open to people with bad credit, making them a good alternative to payday loans.
Credit union loans offer similar products to traditional banks and lenders. These products can range from direct deposit, mobile banking, ATM access, and even overdraft protection. The only difference between credit unions and traditional banks is that the latter are money-making institutions.
In contrast, credit unions are nonprofit organizations, which means that credit unions are member-owned. With that in mind, credit unions can pass their savings along to their members, typically in the form of higher interests in savings accounts and charging lower interests to loans and credit cards.
3. Pawn Loans
Pawn loans can be a quick alternative to borrowing money. They don’t involve a credit check and have a shorter application process. They differ from a payday loan in the amount you can borrow. Usually, the loan amount is equal to the value of the item you want to pawn.
For example, you have a pretty rare brand of guitar that can be worth a few hundred bucks. Your pawnbroker will then assess its value and offer you a loan that’s equivalent to the value of your guitar. It’s a type of secured loan where you have to pay the loan amount to get back your pawned item.
Final Words
There are many more alternatives to payday loans, but the ones listed above are some of the easiest and quickest ways to borrow money. If you’re in a pinch but don’t want to get a payday loan, then try some of the alternatives listed above. They are simple and just as quick and easy as a payday loan.
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