Some untrustworthy sources have been spreading false opinions about payday loans. In reality, alternative lenders, giving out payday loans, have been helping borrowers all over the country and the borrowers only benefit from that cooperation.
In order to know how to borrow responsibly and get the most from payday loans for your financial independence, you have to know true facts about those lending options. Here are the top 5 myths about payday loans proved wrong.
1) Payday Loans Are Only for Financially-Challenged Borrowers
True, those borrowers with bad or no-credit scores would faster get a loan from an alternative lender online than a loan at the regular bank. But other borrowers who have a well-managed budget and financially stable standing do benefit from payday loans as well.
The truth is, when a person suddenly has an emergency, a medical one, or of another nature, they would rather turn to alternative lenders than wait weeks for the approval of a credit union or a bank.
Online lenders are more flexible concerning credit score checks or requirements about the high level of income. For example, e-transfer payday loans Canada take only a day to process the loan request and issue the loan. Plus, online creditors really help out in those situations when a financial urgency happens before the paycheck arrives.
2) Payday Loan Always Come With High Rates
If you have seen ads from websites that charge a 0% rate for loans, you can’t trust those. Lenders do charge interest but it is merely to pay for the service they provide their customers with. Nobody does their work for free. And the interest that is charged for a payday loan is comparatively lower than the one you can find at a regular bank.
Most alternative lenders don’t have an origination fee. Some have also forsaken the additional fees for pre-payment. You can even ask for a payment extension if you find yourself in financial hardship.
If you miss or are late with a payment, you will face the consequences, though.
3) Payday Lenders Have Extra Fees
Those who are unfamiliar with the Truth in Lending Act can spread this disinformation. The act clearly states that the lender has to be truthful about all the fees and charges that forego or may occur at the end of the loan life.
The document that can provide the fullest information on fees and additional charges in special cases is signed by both the lender and the borrower. Thus, the lender specifies the legal cause of the fees, interest, and additional charges, and the borrower either agrees to or not.
Apart from the interest rate that is calculated on the loan and seen upfront, other additional payments can come from:
- Late payments;
- Missed payments;
- Loan default on the borrower’s behalf;
- Prepayment of the loan (if such is mentioned in the loan agreement).
In any case, the borrower has to read the loan agreement thoroughly in order to be aware of all the financial implications of the loan process.
4) Only Borrowers With Good or Excellent Credit Can Take Out Loans
The misunderstanding originated from the frequent refusal of loans to people with either bad or no credit scores at banks. In reality, borrowers who have failed to take credit before can always have a second chance. They can successfully take out loans and, if the lender reports their loan behavior as good, they can even improve their credit score.
It’s a known fact that online lenders only perform a soft check of the credit score. Borrowers with all kinds of credit can apply for loans if they are ready to repay them. There is an option to pre-qualify for a loan, where you input the desired loan amount and your credit score and can see what interest rate you are looking at. The pre-qualification doesn’t reflect on the credit score in any way, i.e. doesn’t worsen it.
The other aspects that online lenders may feel different about are the borrower’s income size and income source. Borrowers who have low income or can’t provide the source of income (e.g. they are paid by a foreign company) can apply for loans as well and discuss the loan conditions with the lenders directly.
Finally, the interest rate directly depends on the credit score. This means that those borrowers with better credit scores could qualify for lower interest rates and those with bad credit scores for a higher one. But the ability to receive a payday loan with a low credit score is still a plus for working with online lenders.
5) It Is More Lucrative to Pay the Overdraft Fee
The overdraft fee is what you pay the bank when you take out the sum of money that is bigger than the one you have left on the banking account. Keeping that in mind, some think that covering that is cheaper than paying the interest on the payday loan.
The thing is that the interest rate is a one-time payment that is calculated on every $100 the borrower gets, whereas the overdraft fees are charged every time you take out the money from the bank. It can range from $30-$54 per overdraft.
In addition, when overdraft fees happen, the bank client is often unaware of that. The bank doesn’t have to notify the client every time it happens. Payday lenders, on the contrary, openly demonstrate their fees in the loan agreement from day one. Consequently, applying for a payday loan is much less expensive than borrowing from a bank.
All those false statements about payday loans are made because of the lack of knowledge about these financial operations. Payday loans are a great tool to cover the hole in the budget when it’s falling apart or help with a money shortage that needs to be taken care of right away. If you know all the facts about payday loans and know your possibilities and duties before the lender, you can safely apply for loans dodging late payments and extra fees. Borrow responsibly.