Before taking out a payday loan, there are certain factors to consider as it will affect your application. You will need to have specific information at the ready to provide potential lenders with the required information.
Let’s explore some of the most common questions around payday loans:
Do You Need a Payday Loan?
Before applying for a payday loan or any other type of short-term loan, you must ensure it is the right product. Unlike credit cards, payday loans are not designed to be used as an ongoing form of credit and should only be used for short-term or emergencies.
Trying to use payday loans in the long term will lead to a spiral of debt, due to the high interest rates and the short window of time for repayment.
If you are taking out a payday loan to assist with ongoing financial problems, you should seek alternative forms of credit which incur less long-term risk.
How Much Money Do You Need To Borrow?
If you are looking to take out a payday loan, it is important to first calculate precisely how much you need. Because payday loans are an expensive form of credit, you should only borrow what you need and what you can afford to pay back. The more you borrow money online, the more you will need to pay back and the more interest you will have to pay.
- Payday loans are for short-term use only
- The more you borrow, the more you need to repay (plus additional interest)
- Before taking out a payday loan, you must consider if you can afford to pay it back
Do You Have A Bad Credit Rating?
Those with a good credit history can demonstrate to lenders that they are reliable borrowers capable of making timely repayments. The better your credit score, the better your chances of securing a loan and receiving the most favorable terms possible. This may include lower interest rates and the ability to borrow more.
However, if your credit score is poor, it may not be the best time to apply for a payday loan as you could be hit with an impossibly high APR. If your credit score is low and you do want to take out a payday loan in the future, there are ways that you can improve your credit to save money in the long run.
Let’s look at a comparison between a high APR and a low APR and what the impact could be:
|Duration||3 months||3 months|
If you have a had credit rating your APR will be higher and in this case it means you would pay an extra $218 over the three months. This is a good example of why it makes sense to improve your credit score before applying.
If you are worried about a low credit score, it might be worth holding off on applying for a payday loan. Unsuccessful credit checks can impact your credit history in the long run and make it more challenging to apply for other loans in the future.
Payday loans can get you access to money in the short-term but can lead to long-term debt.
Can You Afford To Pay Back a Payday Loan?
When applying for a payday loan, you will always need to provide details about your income and earnings, be it from a full-time job or any other sources of income you can demonstrate.
For those that are employees, they will need to request pay stubs, a salary letter and / or W-2 forms from your employer. If you are self-employed, applicants will need to show tax returns for the past two or more years and, additionally, depending on the lender, invoices and receipts.
The reason for demonstrating your income is that the lender will need to see that you can afford your monthly loan payments.
Depending on the lender, they may accept other sources of income apart from your primary source. For example part-time jobs, government benefits or your spouse’s income.
In addition to your income, lenders will want to know your monthly outgoing payments, particularly debt obligations. This is sometimes known as the debt-to-income ratio and refers to how much your debt represents versus how much you can bring in per month. Rent and mortgage payments are obligatory monthly payments and represent your monthly ‘debt’; also, any existing debt on credit cards or other loans.
Depending on the lender, they may also look at your net worth or, in other words, your assets minus your liabilities. Assets are things you own that hold value, including property, investment accounts or even material assets such as jewelry or antiques. Liabilities are any financial obligations such as your mortgage or any outstanding student loans.
Should the application be successful, a payday loan will become a liability on your financial profile. This may affect future loan applications or impact the purchase of any assets.