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This payday loan calculator will help you determine the actual annual percentage rate (APR) and total cost of a payday loan. It is an excellent tool to estimate or compare the cost of taking out a payday loan with an alternative loan. Financial emergencies can arise before payday, and you might not have the funds to cover the extra expenses. Maybe because you don't have enough in savings or your funds are tied up in an investment, such as a fixed deposit, or perhaps you have bad credit, or you just don't earn enough.

A payday loan can help you access instant credit when you are low on cash. But payday loans come at a cost, and if you are unable to repay them on time and in full, it can become dangerous. The payday loan calculator can help you detect and avoid this mishap. If you're considering taking out a payday loan, you should first check out the personal loan calculator to determine the payday loan interest rate you can afford. This article will help you understand exactly what is a payday loan and how do payday loans work, the alternatives to payday loans, credit-builder loans, and how you can pay off payday loans if you're already using them.

What is a payday loan? – Payday loan definition

A payday loan is a very short-term loan provided to a borrower on the agreement that the loan is repaid on their next payday. Lenders offer the loan as a percentage of the borrower's next paycheck, allowing them to access their wages upfront. Therefore, payday loans are also referred to as payday advance or cash advance.

Payday loan lenders usually charge a very high-interest rate because they provide loans without collateral, but the borrower gets access to the credit immediately.

Although Payday loans provide instant cash with minimal documentation in times of emergency, the trade-offs are enormous, for instance:

  • Borrowers may be required to repay the entire loan amount, interest, and fees at once.

  • Payday loans can have an annual percentage rate as high as 400%.

    The annual percentage rate (APR) represents the actual interest you pay on loan yearly.

    You can calculate the APR of a payday loan using the formula:

    APR = ((finance charge / loan amount) * 365) / term * 100

    APR = ((15/100) * 365)/14 * 100

    APR = 391.07%

    That means, if you borrowed $100 with a finance charge (or interest) of $15 for 14 days, if you fail to pay back the loan in the timeframe, extending into a year, you will owe over $391, excluding the monthly fees on the loan.

    What monthly fees?

    Most payday loan lenders charge a fixed percentage of the outstanding loan amount as a monthly fee. The monthly fee is designed to further reduce their risk and improve their return on investment (ROI) on the loan. Usually, the fee ranges from 4% to 10% of the outstanding loan balance every 30 days. This means that every 30 days from the first day you take a payday loan, you get to pay a monthly fee on the loan balance. If you take the loan for less than 30 days, you pay the monthly fee once, but if it extends beyond 30 days – even by a day – you pay another monthly fee. So make sure you also look out for how much percentage a lender charges as a fee, not just the finance charge or interest on the loan!

    Using the payday loan calculator in advanced mode, you can estimate how much the loan will cost in total by simply inputting the percentage charged as a monthly fee. It is a good way to compare the loan cost offered by different lenders.

    Compared to credit cards, which usually have an APR of around 24% when it's on the high side and the average personal loan APR of 9.34%, it becomes clear how predatory payday loans can be.

If you cannot meet the deadline of a payday loan, the lender can offer to roll over the loan for a fee or even offer another loan. Rolling over your payday loan can seem like the right solution to buy more time. But the fees and the interest on the original loan amount can quickly accumulate to make paying off the loan even more costly, leaving you in an even worse situation. With the payday loan calculator's chart, you can find out how these costs accumulate.

The predatory nature of these payday loans has brought them under scrutiny in most countries. In the US, some states ban payday loans completely while the Consumer Finance Protection Bureau (CFPB) has tried to establish rules to regulate payday loans. In the UK, the Financial Conduct Authority (FCA) established rules to protect borrowers from paying more than twice what they initially borrowed.

But many people are unable to meet their financial obligations without a payday loan either because they don't earn enough or have a bad credit history and are therefore unable to get bank loans, especially during emergencies.

That is why the payday loan market has persisted. People with low credit scores can access instant loans from lenders who don't care about their credit history. And people with little or no savings to cover an emergency are likely to settle on payday loans in the absence of an emergency savings account.

Before you take a payday loan, even in an emergency, it is crucial that you fully understand the financial implications that come with it. If you're low on cash now, are you 100% sure you will have the money to pay back the loan with interest within the timeframe? Have you exhausted all credit alternatives? Do the results from the payday loan calculator recommend taking the loan?

We need not emphasize that taking out a payday loan to cover a non-emergency item such as a luxury purchase or a vacation makes less financial sense than saving up your funds over time. If you need to pay off a debt, the debt payoff calculator will help you determine how to achieve that in the best way. Taking a payday loan to buy time is not a recommended strategy.

How do payday loans work?

Payday loan lenders are often non-bank companies who offer their services at storefronts or through an online lending platform. But whether you're getting your payday loan online, from a bank, or at a store, the payday loan definition remains the same: the application process is straightforward with few requirements you can complete it in minutes.

The lender will typically need to see that you received payment from your employer in the previous month and that the amount you're requesting is within your income limits. This information will help them fix the loan terms and rate. Then, you will need to provide:

  • Proof of your income – to verify your ability to repay the loan;

  • Your next payday – to set the loan term, usually a few weeks; and

  • Bank details – of the account your employer deposits your paycheck.

Once the information provided is verified, the loan application will be approved.

The final provision before the lender deposits the loan into the verified bank account is a:

Provided all requirements are satisfied, you will receive the loan immediately or within 24 hours.

If you apply for a payday loan online, you may be required to authorize the lender to debit your bank account automatically upon receiving your paycheck. By authorizing the lender to automatically take its payment from your bank account or using the postdated check when you get your next paycheck, the lender's risk is guaranteed. And the lender can ignore your credit history. But it also comes with a personal risk to you because when you repay the entire loan – principal, interest, and fees – the balance in your account might not be enough to foot other bill payments.

Some lenders may require your credit score and credit history to set the loan term and rate. If a payday loan lender requires this information, they can perform a hard credit check at the application time. When a lender performs a hard credit check on you, if you eventually fail to repay the full amount of the loan by the required date, it will negatively impact your credit score and financial history.

Your bank may also offer small loan amounts like the payday loan if you maintain your salary account with them. Getting your payday loan from a bank will likely get you a more reasonable payday loan interest rate to access a percentage of your monthly net income upfront.

Nonetheless, payday loans are considered predatory loans. Many borrowers who cannot repay the high-interest rate and fees and still meet their everyday living expenses end up defaulting. And when the loans are rolled-over beyond the initial repayment date, it incurs more fees and interest. That is why you must use the payday loan calculator before taking out any of such loans.

For instance, if you pay $20 for a $100 loan and then roll that loan over when it's due, you will have an additional $20 finance charge, meaning you now owe $140. This arrangement forces a borrower to borrow more to cover the previous loan taken. An initial $100 loan could balloon into $1000 by the time the borrower escapes the debt trap. Ultimately, their credit score plunges, and they lose the chance of getting good long-term loans from conventional lenders.

Alternatives to payday loans

Payday loans should be a last resort in an emergency. It is always best to explore other options first before considering it. Some of the means you can use to generate funds quickly to meet unexpected financial responsibilities are not very convenient. But they can help you stretch your finances to the next payday, and they are certainly more convenient alternatives to the repayment conditions of a payday loan:

Delay payments

If you cannot meet the deadline for a bill, start by asking for an extension on your payment until your next payday. You can offer to make a partial payment and arrange for the bill balance to be deducted directly from your account immediately you get your paycheck, the same way payday loan lenders get their repayment. Offering this approach to a creditor eases their fear of a default and shows you are willing to pay.

Get an advance from your employer

Borrowing from your employer should be the next resort. If you can get an advance on your paycheck to sort out an emergency, it is best to ask for it. You will have no obligation to anyone (other than your employer), and you wouldn't need to pay any interest when your employer deducts the advance from your paycheck. If you don't ask, you'll never know how kind your boss is.

Reduce your expenses

Increasing your sources of income is not always easy. But you can always find ways to reduce your expenses and save for unplanned incidentals. For instance, instead of eating out, cook your meals yourself. Instead of paying for a gym membership, go jogging in the park. Instead of buying expensive brands, purchase cheaper unbranded alternatives. Changing your lifestyle can be difficult at first, but it can help you save and invest towards your financial independence.

Sell your stuff

The payday loan definition is basically "quick cash" – so if you need quick cash and have valuables that you can do without, you might want to do away with them and generate some funds. You can always get them back when things stabilize financially. You can sell your designer items for a few bucks. Likewise, you can sell your iPhone and get a cheaper mobile in the meantime. You can rent out your space on Airbnb or enlist your car on Uber. These can be inconvenient in the short term, but you'll generate quick cash and pay off your emergencies without fear of getting in debt.

Take a pawn loan

An alternative to selling your valuables is to get a collateral-based loan from a pawnshop, using them as security against the loan. The pawnshop will hold the item and lend you an amount equivalent to the item's resale value, with a usually high fee, or they will charge a lesser fee if you borrow only a portion of the item's worth. If you repay the loan, you'll get your item back. But If you stop making payments, the pawnshop will eventually sell your item to recover its loss. However, you don't have to worry about any repercussions on your credit score since pawnshops will not report the payment to a credit bureau.

Get a loan from a cooperative, credit union, or bank

Securing a loan from these sources may not be as fast as other options, but they are worth considering. Cooperative and credit unions offer loans at favorable APRs to their members. Some banks also provide payday loans or small loan amounts for customers who maintain an account with them. It's good to check in with these options. And if you're not a member of a cooperative or credit union already, you should consider joining one.

Borrow from your family and friends

Don't be afraid to ask for financial help from family and friends. They can be a great source of help in times of trouble. When they cannot lend you money, they provide help in other ways to lessen your financial burden. They can also help by providing food and other essential goods you need to sustain yourself until your next payday or even introduce you to connections that can offer the funds you need.

Use a credit card

If you have not maxed out your credit card, it is better than a payday loan. A credit card gives you more time to pay back the money, and you can break payments conveniently into manageable parts. If your paycheck comes in as expected, and you pay off the credit card balance, you can even avoid paying any credit card interest.

Get an installment loan

Installment loans are short-term, like payday loans, but take payments in small portions, making them more flexible for borrowers over time. The APR for installment loans depends on the loan type, but they are much lower comparably. However, unlike payday loans, you will need to meet specific requirements in terms of income and credit score, and you cannot roll forward paybacks. Most installment loans will have a fixed monthly amount you're required to pay, and the amount won't change throughout your repayment period. The payments' predictability can help you budget for your monthly expenses and avoid debt and extra fees. Examples of installment loans are mortgage loans, auto loans, and student loan.

Apply for a personal loan online

Some online lenders offer personal loans at reasonable rates. It is possible to get these loans within a business day without the requirements of your credit history. You can check out our personal loan calculator to learn about personal loans and make an informed decision if you're comparing lenders.

How to decide the best alternative?

When weighing alternatives for quick-cash, the best alternative is the one that provides:

  • The lowest interest rate – it's always reasonable to negotiate lower interest rates and favorable terms. The less interest you have to pay on a loan, the greater your chance of not defaulting.

  • Best impact on your credit score or credit history – if you get a loan from an institution such as a credit union or bank, it can help build your financial credibility if you stick to the loan terms. It's an excellent way to prepare for future financial obligations. But if you're unsure about things, it will be worth avoiding these institutions because failure to repay your loans will impact your financial health negatively.

  • Repayment flexibility – it's crucial to manage your loan repayment schedule, renegotiate terms when things are not going as planned, and discuss options with a lender. Some lenders offer flexible repayment schemes, and others are quite strict with their terms. If you don't have a reasonable repayment plan after taking a loan, you will be in trouble when the loan is due. Hence, you want a flexible lender who offers you different opportunities to meet your loan repayment conditions.

How to get out of a payday loan trap

Since you found the payday loan calculator, and you've read this article to this point, then you're already on the path to avoiding a debt trap. If you haven't got a payday loan, you can avoid it by improving your credit score and building your emergency savings, so you never need to get one. But if you are already using payday loans, it's best to stop immediately and begin the daunting challenge of building good credit for yourself first.

A few steps to get underway:

  1. Check with your lender to arrange installment payments for your loan balance. This method would allow you to break the loan into bits, rather than making a full payment all at once. Paying in small portions will allow you to cater to your essential needs while also chipping off your debts.

  2. Offer to make more partial payments on the remaining loan after covering your cost of food and other essential expenses such as rent and utility bills. By committing every scrap of money left towards your loan, you will hasten your debt settlement. If you're wondering how to cut expenses on rent, you should check out our rent calculator article for some tips.

  3. Get a second job and sell your unneeded items. You can take on some part-time work as a side hustle and carryout a garage sale to generate some cash.

  4. Build a savings habit. By the time you pay off the loan with the extra cash from the sales and your side hustle, you should have built a robust financial habit to reduce your monthly expenses.

  5. Join a credit union. Being a part of a community you can contribute to and get financial help from is a great way to start developing your social security net. You will enjoy the benefits offered to members, including getting affordable loans when you need them.

  6. Get a credit-builder loan from the credit union or a community bank.

What is a credit-builder loan?

A credit-builder loan is a loan specifically designed for people with bad credit. It's the easiest way to build a positive payment history from scratch.

  • When you get a credit-builder loan, the money you agree to borrow, usually between $300 and $1000, is deposited into a bank account in your name but held by the lender.

  • You only need to deposit enough money into the bank account to cover the loan term's interest. Usually, the APR on the credit-builder loan is around 10%, and for a term of 12 months, you only need to deposit about $36 for a $300 loan.

  • Each month, the lender will withdraw an amount that covers the monthly principal and interest payments. The lender will then report these payments to the credit bureaus in your name. At the end of the loan term, the lender has taken no risk, while you have a good payment history in your name. Other establishment fees may be required to set up the loan, but this is the fastest approach to build your credit score if you're starting from scratch.

Now that you know what is a credit-builder loan, understand the risks of taking payday loans and how useful the payday loan calculator can be in making your financial decisions; here's a brief overview of the advantages and disadvantages of payday loans.

Advantages and disadvantages of payday loans

Summarily, the advantages and disadvantages of taking a payday loan are as follows:

Advantages

  • The main advantage of payday loans is that they will provide the cash you need quickly.
  • In times of emergency, you can get the funds you need with little or no documentation.
  • If you don't meet a conventional lenders' credit requirements, a payday loan may be a good option because it does not rely strictly on your financial history as long as you are sure of your next paycheck.

Disadvantages

  • Lenders design payday loans to make customers reliant on them because the loan repayment due date is very short-term.
  • The fees remain the same throughout the loan's life, and they can accumulate exponentially every time a lender extends the due repayment date.
  • If you rely on payday loans, you will have less money to cover monthly essentials. At worst, you can even fall behind on your monthly paycheck.
  • Payday loans can derail a borrower's financial health and credit score.
  • Payday lenders charge borrowers the highest interest rates in the loan market.
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