Why All Payday Loans Are Short Term Loans
Have you ever wondered why payday loans have to be paid back over such a short period of time?
When lenders created payday loans, it was a simple idea. Advance borrowers some cash until they could pay it back with their next paycheck.
Unfortunately, some borrowers kept extending the loan and each time they did so they had to pay extra fees. This ended up costing borrowers a lot more when they give cash to borrowers in the form of a loan. So they had to figure out a way to determine if a borrower could and would pay them back on time.
Some required collateral (items of value), which could be taken and sold if the borrower failed to pay the money back. Others used credit reports to determine if the borrower qualified for other loans or credit cards and paid them back on time.
Payday Lenders Meet a Need
But, an even smaller group of lenders saw a need for short term loans to people facing short-term financial emergencies.
- A borrower needed $200 to keep his power on and avoid disconnection and late fees.
- An employee needed $400 for a car repair to get to work and earn his next paycheck.
- Consumers lost track of their bank balance, made a checking error, and wrote a check for groceries. Now they need a few hundred dollars to avoid even more costly overdraft and bounced check fees.
In other words, the borrower faces a short-term financial emergency and needs a small loan to get them to payday. And, they are willing to pay a little more for the loan because it is cheaper than the alternative – overdraft fees, downtime at work, late and reconnection fees.
The Economics of a Payday Loan
Due to the amount of the loan, which is usually much smaller than what a bank lends, the lender has to get the money back faster. This way they can lend it out again. They don’t make money by lending large amounts of money paid back over long periods of time, but by lending small amounts of money and getting paid back quickly.
If the loans weren’t short-term, it wouldn’t make sense for lenders and these types of loans would not be available to borrowers in need.
Innovative Payday Lenders
Fortunately, a group of innovative payday lenders also realized that offering more time to pay the loan back would also bring them more business. These lenders started offering payday loans with two or more installment (or periodic) payments. Now, the borrower does not have the pressure to pay back the entire loan in one pay period.
Less comes out of each paycheck, which means they can get a larger loan. Multiple payments over a longer-time period also buys them time, to cut back on purchases, work extra hours, or even take a part-time job until the loan is paid back.
How To Apply For a Short-term Loan
If you have a job with a consistent paycheck and an active checking account, you can usually get approved for a short term loan. Simply fill out our fast, secure online application.
Then, your information will be submitted to dozens of lenders. In less than an hour, you should start receiving loan approvals via email. After that, you can review your offers and choose the one with the lowest cost or longest payback period, whichever fits you the best.
You don’t pay any fees until you actually select and commit to a loan. The cost of the loan is based on the lenders terms, the interest rate and any fees. Typically, it is factored equally into each payment(s).
The cost for the loan should be spelled out clearly in your loan approval. If you are unclear about any of the fees or the repayment period, ask your lender to explain the details.
The lender determines your repayment period. Most payday loans are paid back in as little as one pay period or as long as three months. You may pay a little more for a longer payback period, but check your loan documents for details.
Pay Back Your Loan on Time
Don’t forget to repay your loan back on time. Many lenders will automatically draft the payment from your bank account. But, make sure you keep up with the date and have the money in your account. The worst thing you can do is forget and overdraft your account. If you payoff the loan on time, it can actually improve your credit rating and enable you to qualify for a less expensive and longer-term loan in the future.