How Do Guaranteed Payday Loans Work?
Wednesday, October 12, 2011
If you are in financial difficulty then the only way to solve the problem might be with a short term loan. And as short term loans go, the only ones that are readily available are guaranteed payday loans. They have got some bad press from some sectors, but is it really justified?
How Do Guaranteed Payday Loans Work?
To better understand the issues involved it's going to be necessary to first have a look at how pay day loans actually work. We'll go over that briefly then, it's extremely simple so it won't take very long.
It used to be that you had to go out to a physical store where they offered pay day loans but that is not the case anymore. Now you can apply over the internet, and it can all be done digitally. And as long as you make enough in a month to be able to cover the loan, and the interest that you'll be charged, then you should be accepted.
This is different from most loans, which require you to meet other conditions as well. For example, usually a credit check is made with other sorts of loans, long term loans. If you have a bad credit history your loan application may be refused or you might be charged higher interest rates than normal.
With a payday loan though, the lender does not make a credit check so it doesn't matter if you have a good credit history or not. That is something that has led some people to believe that payday lenders are just looking to set up debt traps, getting people to borrow money that they cannot really afford. Is that really fair though?
The No Credit Check Rationale
If you want to understand why a payday lender is not going to make a credit check, it's useful to understand why a bank or another long term lender will. That's because the loan has to be paid over such a long period of time that nobody can really say what the circumstances are going to be for the borrower for the whole term of the loan. So they look to the past to better predict whether they are going to be good at paying back the loan.
With guaranteed payday loans of course it is very different. They usually have to be paid back the following month, and there is not so much that can change in that period of time. Certainly nothing that a credit check could tell them about. So as long as the potential borrower makes enough to cover the loan in a month, they reasonably assume that this will not be a problem.
Payday lenders could be overly cautious and make a credit check of course, but this would mean that it would take longer to get one. And due to the fact that they're such short term loans anyway, any delay in being able to accept the loan or not would make them less useful.
Are They Expensive?
When you're looking at a loan, something that you have to pay close attention to is the interest rate that is being charged. That is going to tell you how expensive it is. And with payday loans, many people say that they are too expensive. They get this idea mainly from the fact that they are looking at the APR, and admittedly that is high. But it is also largely meaningless.
What the APR (annual percentage rate) measures is how much interest you pay on a loan in a year. And if the loan is supposed to last less than a year, as a pay day loan is, then it simply extrapolates forward assuming that you don't repay for a year. Clearly then this is a useless way of judging the interest rates on pay day loans. The actual amount of interest that you pay is actually much the same as you would with a long term loan.
How Do Guaranteed Payday Loans Work?
To better understand the issues involved it's going to be necessary to first have a look at how pay day loans actually work. We'll go over that briefly then, it's extremely simple so it won't take very long.
It used to be that you had to go out to a physical store where they offered pay day loans but that is not the case anymore. Now you can apply over the internet, and it can all be done digitally. And as long as you make enough in a month to be able to cover the loan, and the interest that you'll be charged, then you should be accepted.
This is different from most loans, which require you to meet other conditions as well. For example, usually a credit check is made with other sorts of loans, long term loans. If you have a bad credit history your loan application may be refused or you might be charged higher interest rates than normal.
With a payday loan though, the lender does not make a credit check so it doesn't matter if you have a good credit history or not. That is something that has led some people to believe that payday lenders are just looking to set up debt traps, getting people to borrow money that they cannot really afford. Is that really fair though?
The No Credit Check Rationale
If you want to understand why a payday lender is not going to make a credit check, it's useful to understand why a bank or another long term lender will. That's because the loan has to be paid over such a long period of time that nobody can really say what the circumstances are going to be for the borrower for the whole term of the loan. So they look to the past to better predict whether they are going to be good at paying back the loan.
With guaranteed payday loans of course it is very different. They usually have to be paid back the following month, and there is not so much that can change in that period of time. Certainly nothing that a credit check could tell them about. So as long as the potential borrower makes enough to cover the loan in a month, they reasonably assume that this will not be a problem.
Payday lenders could be overly cautious and make a credit check of course, but this would mean that it would take longer to get one. And due to the fact that they're such short term loans anyway, any delay in being able to accept the loan or not would make them less useful.
Are They Expensive?
When you're looking at a loan, something that you have to pay close attention to is the interest rate that is being charged. That is going to tell you how expensive it is. And with payday loans, many people say that they are too expensive. They get this idea mainly from the fact that they are looking at the APR, and admittedly that is high. But it is also largely meaningless.
What the APR (annual percentage rate) measures is how much interest you pay on a loan in a year. And if the loan is supposed to last less than a year, as a pay day loan is, then it simply extrapolates forward assuming that you don't repay for a year. Clearly then this is a useless way of judging the interest rates on pay day loans. The actual amount of interest that you pay is actually much the same as you would with a long term loan.
About the Author:
Bradley Scott, is an authority in a wide range of financial matters. His writings can be found frequently at www.guaranteedpayday.co.uk which is where you can learn much more regarding payday finance.
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