Understanding payday loan and pitfalls associated with it

Of lately, payday loan has been the talk of the town. Payday loans are short-term loans with a high rate of interest and works differently than the regular bank loans. The laws governing the loans vary according to the state. While the loan lenders in UK must be approved by the Financial Conduct Authority, lenders in Australia must consist an Australian credit license. 

Characteristics of payday loans

1. The loans are given for a small amount. The amount can be as small as $500 or less depending on the definite state regulation.
2. The lenders do not consider financial obligations.
3. The loans are reimbursed as a single payment on the next payday or when income from other sources is received.
4. The reimbursement date ranges from 14 to 28 days from the date of sanction of loan. However, it can vary depending on the place. For instance, repay time for payday loan Australia ranges between 16 days to 365 days.
5. The loan proceeding is made by cash or check, a debit card or deposited to your bank account (electronically).
6. Depending on the state, the ones in need can get a payday loan online or through stores.
7. If the loan is not repaid on time, the lender can withdraw money from the borrower’s account (electronically) or can encash the check.
8. The loan is repaid by writing full balance (including fees) post-dated checks or by providing authorization to the lender to withdraw the amount from the bank, prepaid card account or credit union.

How does payday loan differ from a regular bank loan?

• Smaller amounts – In places where payday loan is legal, one can borrow the amount as small as $375 ($500 in some states).
• No credit assessment – Before sanctioning the loan, banks often check credit to determine the loan approval and interest rate. But with a payday loan, the borrower need not require a credit. The borrowers must be 18 years old, should have an ID proof, bank account and income proof.
• Automatic reimbursement – A borrower is required to hand over a signed check or authorization to the lender to withdraw the cash from the bank account (borrower’s). If the amount is not paid on time, the lender encashes the check or draws money from the borrower’s account. 
• Hassle-free renewal – If the loan cannot be repaid on time, then the borrower can pay an amount equal to interest rate and get an extension of two weeks for repaying the loan. Also, a second loan can be taken to clear the first one.