A payday loan popularly known as a cash advance or salary advance is a type of loan-business in which the lender offers a specified agreed-upon amount of money to the borrower. The borrower, in turn, is supposed to pay the loan plus interest on the next time they are paid a salary, hence the loan is known as ‘payday loans’. These type of loans are easy and quick to access loans than other money lending institutions like banks. In another scenario, payday loans can be offered as an overdraft to a pre-agreed line of credit in the form of credit cards. The loans provided by payday loans do not require security.
The loan qualification is far less demanding than those offered by other lending institutions. They require proof of employment and a constant source of income via employment cheques, payrolls, a record of employment or bank statements for self-employed individuals, and in some cases, they need to do a thorough check on one’s credit score. The latter requirement is not an absolute requirement because individuals who seek out payday loans do not have the perfect credit score. Once proof of employment is verified, the agreed principal amount is wired directly to the borrower’s account.
Once the due date of repayment has arrived, the borrower is supposed to repay the loan by writing a cheque or a standing order to Payday Loan that has the full principal amount plus the interest. In case the borrower is unable to pay the loan, the lender can write a letter to the borrower’s bank to redeem the full amount from the borrower’s account. If the amount available in the bank account is not sufficient to fully settle the loan, the borrower will be charged a bounced cheque fee on top of the accruing amount and additional cost from the lender.
The amount of principal given differs depending on the agreement, credit history, and credit score of the individual. However, the rate of interest varies from one lending institution to another. As a borrower, it is crucial to consider the interest rate, the terms, and conditions of the contract before getting a loan. Traditionally, individuals in need of mortgages used to physically visit the premises to place their applications for the credit. Currently, the mode of acquiring the loan has been modified for easier access via online services. All one needs is to supply the required details and documentation. Once the application is successful, and the terms and conditions of the contract are met, the principal amount is wired to the borrower’s account.
To prevent cases where a borrower is unjustly penalized or high interest being charged on loans, financial laws are put in place by the country. The legislation implemented differ across the different states. Generally, the regulations put in place regulate the APR, which is the annual percentage rate.
Lastly, before securing a loan, one should consider the repayment period and the repayment schedule of the loan. This will help in mitigating the disastrous financial implications to the borrower when the loan is not repaid in due time.