Last Updated on May 29, 2020
Once you start working, it can be difficult initially to maintain a budget or to know how to divide your salary in the expenses efficiently. In such cases, to stay afloat, you might require additional money to solve your money crunch.
Borrowing from your known can be very difficult and tricky, even embarrassing. Rather, you can apply online for payday loans in Canada. Do you know what that is?
Let’s have a closer look at payday loans
Payday loans are basically “financial instruments offered by micro-lenders.” Banks don’t get involved in this but independent lenders who are ready to take the risk of defaulters. The market is way too risky for them, unlike payday lenders who have insurance to avert the losses. Generally, a loan such taken is to be returned by the next paycheck you get.
The most significant players in this market follow the policy where they cover the expenses with the lender’s assets by liquidizing them. If you see the demand for such loans in America accurately, it is the American Africans, divorced, and people living on rent. Whoever falls in the bracket of the annual income of $15000 to $25000, are opting for this.
The tricky part
The problem stated by them is unforeseen expenses or financial crisis, which leads to disruption in day to day expenses like credit card bills and monthly utilities plus groceries. Although this financial instrument helps you in an emergency, it comes with specific terms and conditions, which has its pros and cons.
Payday loans can help you out of a financial crunch or can push you into one. Let’s understand how it can be beneficial.
Why are banks not involved in payday loans?
Banks are always a reliable source to apply and take loans from. But the procedure they follow is lengthy and time-consuming. They check your background and then approve your loan request. It verifies you as a lender for them, which is nowhere when it comes to payday loans.
The nature of payday loans is instant, and for people with not so stable financial condition, in most of the cases, such loans are only liability for banks.
Requirements to a legitimate for payday loans
You must know that you won’t be getting a substantial amount as the loan amount. This is because higher digits lead to more significant risk, therefore by opting for a smaller amount, the money lenders mitigate the risks.
The things required to qualify as a payday loan Lender are:
- Social security number
- Proof of income
- Copy of payslip
The leading player: APR
If banks are refusing such a financial instrument, why independent creditors are interested in it? It is an important question which you should ask, and the answer is APR. APR stands for annual percentage rate and the reason behind why creditors give out payday loans.
The price can go as high as 24%, which means you will be paying $24 for every $100 you borrow.
Some credit cards, though, ask for no interest initially, but as the tenure proceeds, they make the interest rate higher. Such schemes are referred to as an introductory period. But the high prices involved are generally for the unsecured cards.
If you choose secured ones, they charge about 15-16%. However, there are catches like no maintenance fee of the account, tag, etc.
You, as a lender, need to take care of that, including the interest rate.
What is the role of credit score in payday loans
The very reason why APRs are such game-changers in payday loans is your credit score. If you have a score anywhere less than 800+, then don’t expect any best terms from banks concerning your loan. Your APR also is increased in this case.
But when it comes to payday loan lenders, if your APR is less than 670, they refuse to give you any credit, or they quote a higher APR. This is the vicious cycle people get trapped in and often fall prey to this. This makes banks reliable and not risky.
The predatory nature of lenders
The fixed expenses and higher APRs make this whole market, and the lenders predatory in the environment. According to a few studies by the Consumer Finance Protection Bureau (CFPB),
“The average APR on a payday loan is around 400-percent.”
This is higher than the most expensive bank loan you can apply for. It is somewhat 17 times more expensive. The lenders understand the fragility of this market.
Hence, they secure themselves from all potential loopholes and threats. This helps in keeping them in authority to ask for such high APR.
Therefore, it is categorically informed to the lenders to make the consumer aware of the terms and conditions. But the urgency and carelessness of the consumer usually lead to ignorance. They also keep this mindset to take the issue at hand seriously and to deal with the consequences later.
The constant rollovers
There is no end to this cycle. You get one payday loan, and you are either stuck in paying the APR or in need of money the next month as well.
The high costs involved make it hard for people to get out of it, especially the people who do not have a stable income or won’t have one shortly to take them of it.
So should you go for payday loans online?
Of course, you can, but you need to understand that they are not a financial instrument you can rely on and can go back to frequently. They are instrumental in the case of a medical or financial emergency where you have to arrange the money within a short period.
While getting into it, make sure you read all the terms, along with that, be particular about your due date. The motto is to avoid delays and leverage payday loans efficiently.