6 Myths About Payday Loans
Payday loans or cash advances are convenient when you need quick cash to finance emergencies and other needs between paychecks. They're easy to access and don't require a credit check or collateral.
Although these short-term loans offer apparent benefits, they can also be misunderstood. Fortunately, this guide is here to debunk the common payday loan myths and provide clear facts to help you decide if they're right for you.
Debunking Myths About Payday Loans
Discover the truth about cash advances below.
1. Payday Loans Are Secured Loans
Your payday loan isn't secured — it's unsecured. That means it doesn't require security interest. You'll write a check to repay the amount on the due date, or the lender will deduct it from your account one month later when your employer pays you.
2. Payday Lenders Charge Hidden Fees
Are there hidden fees in payday loans? No! The federal Truth in Lending Act requires lenders to disclose all their fees. That means these rates and terms are available on the lender's website. Before applying for a short-term loan, ensure you understand the associated fees, including late payment charges.
3. Payday Loans Are Only Offered in Person
You can access a cash advance online or in person at the provider's location, depending on your preferences.
4. Payday Loans Charge High Interest Rates to Make More Profit
Payday loans are expensive to administer. While it's true that providers charge interest, it's more so to keep the lights on rather than make a massive profit. The interest charged for payday loans covers the provider's business costs like rent and employee payroll. Payday lenders must also account for costs of defaulted loans. Ultimately, the interest rate is so that the provider can continue to provide their services.
5. Payday Loans Are Expensive
Payday loans are cheaper than overdraft bank fees. Typical charges range between $10 and $30 for each $100 borrowed, while the typical overdraft fee can be as much as $35 per transaction.
The bank may charge these fees without notifying you, resulting in accumulated costs. Overdraft fees can get costly, especially if your bank charges a fee every day your account remains overdrawn. In contrast, cash advance rates are transparent and fixed.
6. You Need Good Credit to Get a Payday Loan
Payday lenders don't require your credit history to provide a loan. They will only check your ability to repay the loan on the next payday.