Understanding the Payday Loan

Staying on top of your personal finances can be a complicated matter. It’s easy enough to draw up a budget at the start of each month and promise yourself that you’ll stick to it. However, reality can often get in the way of achieving your fiscal goals.

Unexpected expenses can arise at any moment, or perhaps your employer is late in sending your paycheck. Whatever the reason, at some time or other you might find yourself needing a bit of extra cash to get by.

The concept of the payday loan is one that has been growing in popularity over the last decade. That being said, payday loan lenders haven’t earned the best of reputations. Here are a few points to help you understand what a payday loan is so you can decide for yourself if it is the right route for you to take.

What It Is

According to Investopedia, “a payday loan is a type of short-term borrowing where a lender will extend high-interest credit based on a borrower’s income and credit profile.” Essentially, if you are looking to borrow a certain amount with the intention of paying it back within a month or two, this is the type of loan you would be looking into.

The catch is that the interest rates applied to these loans is generally much higher than those of, say, a credit card.

When you consider the interest rate in terms of APR (annual percentage rate) though, the overall sum of interest paid might not end up being such a large amount. A 2016 CFA study showed that on average the attitudes of consumers who took out payday loans were generally positive in regards to cost and affordability.