If you’re unfamiliar with what a payday loan is, it is effectively a short-term loan that is typically due by the time your next paycheck arrives, hence the term “payday.” As a result, you can usually expect the funds borrowed to be due anywhere between two to four weeks and in full. They are also unsecured, so you don’t need to put up any collateral.
These loans are small by design, with most of them usually ranging between $50 and $1000, which makes them well-suited for dealing with small emergency expenses. Furthermore, since they don’t have stringent eligibility requirements, this also means that you can easily secure payday loans with unemployment.
However, you should also bear in mind that they tend to come with high interest rates, and since their repayment periods are short, this tends to make them tough to repay.
What Are The Typical Terms For Payday Loans?
To obtain payday loans from CocoLoan, you will usually need to provide proof of employment, a valid United States government ID, and an active bank account under your name. Some lenders may even have certain requirements in regard to how much money you need to be earning before you are able to borrow a loan.
In regards to interest rates, this can often vary depending on the lender that you are matched with, but on average, payday loans can go as high as 400% or more. You should also keep in mind that payday lenders tend to charge high fees for late payments.
Some lenders also charge other potential fees, such as application, origination, and processing fees, which is why you should make sure to read the fine print of the loan agreement before signing it.
Do Payday Loans Affect My Credit?
Most payday lenders don’t typically carry out credit checks, so you don’t have to worry about a payday loan application showing up on your credit report. These loans will also not show up on your credit report even after accepting the loan.
Furthermore, most payday lenders are unlikely to report any on-time payments, which means that they cannot help you improve your credit score.
That being said, if you fail to make your repayments on time, there is a high chance that the lender will sell your account to a collection agency. If this happens, then the agency may report the delinquency to the relevant credit reporting bureaus, which will significantly damage your credit score.
Pros and Cons of Payday Loans
Before you decide to apply for a payday loan, it is important that you keep in mind that these loans have their benefits but also come with negative consequences to consider.
In terms of positives:
Pro: Easy to access
One of the main advantages of borrowing a payday loan is that they are relatively accessible to borrowers of all credit types. On top of that, many payday lenders are able to provide an immediate decision on your loan application and fund you within 24 hours.
Also, given that most of these loans can be applied for online via sites like CocoLoan, this means that you can secure a loan at any time or day of the week.
Pro: Fewer lending requirements
Unlike traditional loans, payday loans come with less stringent lending requirements, as all you typically need to qualify is to be 18 years of age or older, be a US citizen, and show proof of income.
You also don’t need to worry about submitting any lengthy paperwork or waiting in long lines, as submitting a payday loan request via sites like CocoLoan will only take a few minutes to complete.
Pro: No credit checks are required
Unlike traditional loans, where a good credit score is necessary to secure approval, payday loans do not require you to have a credit history.
In fact, most payday lenders do not even conduct any hard credit inquiries on your report, so you don’t have to worry about your credit score being lowered by several points. This makes them ideal for anyone in need of a quick financial fix who is unable to get approval from a bank or credit union.
Pro: No collateral needed
Unlike an auto loan or mortgage, when it comes to borrowing a payday loan, you do not need to worry about having to put up any collateral.
This means that if you default, the lender cannot seize your property. However, you should keep in mind that failing to repay your loan on time can still lead to serious consequences, like being taken to court.
In terms of the negatives:
Con: These loans can be expensive
The biggest problem with taking out payday loans is that they often have extremely high APRs that can even average up to 400%.
When you consider that most personal loans go up to a maximum of 36% and most credit cards go between 12 and 30% on average, it is easy to see how much of a loss you can stand to make. The good news is that most states regulate payday loans, so there is usually a maximum that lenders can legally charge.
Con: They don’t build credit
Unlike traditional loans, payday loans cannot be used to build credit since most lenders do not usually report on-time payments to credit bureaus.
However, this does not mean that they cannot damage your credit score because if you default and the loan account is taken over by a collections agency, then they may report your case. If this happens, there is a high chance that your credit score could be seriously damaged, which will only make it significantly harder for you to secure credit in the future.
Is A Payday Loan Worth It?
If you consider the steep interest rates, short repayment periods, and extra fees that often come with a payday loan, it is not often a good idea to get one.
This is especially true if you are not confident in your ability to repay the loan on time and in full when the due date arrives. It is for this reason that you should consider other options carefully before you decide to apply for a payday loan.
However, if you do find yourself in need of an urgent cash loan and you are sure that you can repay it in full once your next paycheck arrives, then it makes sense to apply for one. They are also worth applying for if you find that there are no other alternative financing options or if your credit score is too low to qualify for a traditional loan.
Just keep in mind that loans should be used responsibly and paid on time. Failure to do so can pose a serious threat to your financial health. In this respect, a good rule of thumb is to use a loan comparison service like CocoLoan, as they can allow you to find the best lender that is in the best position to provide you with reasonable rates and fair lending terms.