What Is A Payday Loan?
A payday loan is a short-term loan you receive from a financial institution pending your actual payday on which you would repay the loan.
Simply put, a payday loan is a loan you collect to settle urgent expenses that you cannot postpone till you receive your salary.
The term “payday” signifies that a borrower will pay back the money when their actual payday arrives. However, in most cases, a borrower may not payback on their payday when they receive their salary.
The loans are sometimes referred to as “cash advances” and are often characterized by high-interest rates. Though the loan is meant initially for salary earners, it is available to non-salary earners in recent times. The essential requirement is that one must have a steady source of income.
Payday loans are unsecured loans. An unsecured loan is a loan that doesn’t require any collateral. Instead, it relies on a borrower’s creditworthiness. Since payday loans are for people who have a steady source of income, financial institutions approve them within minutes. They know the borrower can afford to pay back when they receive their salaries.
These types of loans are generally approved within minutes and are available to borrowers with poor credit history. This makes them helpful for emergencies. However, a borrower should be cautious of the accompanying high-interest rate and late repayment fees.
Payday Loan Example
Daniel’s car unexpectedly breaks down, and he calls the mechanic to fix the problem. After taking a look, the mechanic informs him that he has to replace the damaged part of the car with a new one. Since Daniel relies heavily on his car for mobility and doesn’t have enough savings to cover the replacement, he takes a payday loan of $600 from his bank to fix the car. When his salary arrives a week later, he pays off the loan with interest, amounting to $660.« Back to Glossary Index