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What would happen if you default on a payday loan?
What would happen if you default on a payday loan
?It's certainly not advisable, yet it is possible with some payday loan companies. These types of loans should only really be considered as a short term financial solution. As part of the application process, the borrower sets a repayment date with the lender. On that date, the agreed amount (plus interest) is taken out of the account you received your salary in.
Payday loans are given this name as borrowers are expected to pay back the money on their pay day. Various factors are considered to make sure that whoever borrows the money, are actually able to pay it back when they get paid. Some of these factors include employment status, salary, and having a valid bank account.
These are required as a way of safeguarding both the borrower and lender. The lender will want to know they are loaning money to a responsible person, and it's in the lenders interest to pay back on the agreed date, otherwise it could cost a lot more.
Interest rates for payday loans are notoriously high. Wait, there's a reason for this. The Annual Percentage Rate (APR) for these loans is usually around 2000%. This doesn't mean that you'll pay back 2000% on the amount you have borrowed for the length of time you have borrowed - it would do if you didn't pay it back for a year (and it would probably cost even more because of late payment fines as well). Considering a payday loan is only borrowed for up to one month, it really equates for a quarter of the amount you have borrowed. Therefore for every 100 you borrow you usually repay around 25 on top of it.
Nevertheless, the repayment amount is high, but the reason is because this type of loan is really only meant as a short term financial solution. In any case, there are situations when people want to defer their repayment or 'roll over'. Whilst some loan companies allow a customer this option, some don't. This is why it is advisable to check with the company before hand if you think you may need to defer repayment.
The main reason it's not advisable to defer repayment is because it could end up costing you so much more in the long run than first anticipated. It is understandable that unforeseeable situations may arise, preventing a customer from paying back the loan. This is why some companies offer the option, and in doing so can charge a lot more in charges, fines and extra interest.
Rolling over and deferral of repayment means extra interest is applied on the original loan advance, with some companies adding late payment fines as well. If you find that you have to default on a repayment then maybe this type of financial solution isn't for you. A long term structured repayment plan from a traditional bank provider may be more effective.
Therefore, if you are in employment, earning at least 500 per month, and you know you're able to repay the money on the date first agreed - then go for it. To give you some examples of scenarios where you would need this type of loan will help you make sure it is right for you. For example if you are struggling to pay utility bills, emergency repairs for the home or car or any kind of bank charges and fees. Basically it's where you would be in a scenario where it could end up costing you more than if you took out a short term loan.
In any of these situations you should be able to pay the money back on your next paycheck, in which case pay day loans would be a perfect short term financial solution.