On a day-to-day basis, paying bills can be a real challenge for most individuals and households. Unfortunately, with the COVID-19 pandemic, the financial situation has worsened, highlighting the need for most people to obtain emergency cash.
Payday loans give you access to short-term funds, but usually at a higher interest rate. Most payday loans are usually between $500 and $1,500 or less. In addition, your personal loan is due when you receive your monthly salary.
One could easily imagine that the pandemic will be helpful to the business of payday lenders. However, quite the opposite happened, as fewer people took out payday loans. This can be attributed to a number of factors.
First, at the height of the pandemic, most states made it easier for households to access cheaper loans. In reality, small business administration (SBA) has undertaken a Paycheck Protection Program to ensure businesses can access loans to stay afloat and keep employees working.
Also, with the federal relief and child tax credit available to many people along with other social benefits, the need for payday loans has diminished. Nevertheless, many finance experts believe that there could be an increase in demand for payday loans very soon. Although there are fewer lockdowns and restrictions, COVID-19 is still in full swing. So the pandemic lending rules may apply to most payday lenders.
Either way, here’s how to navigate getting and using a payday loan during the pandemic. In this article, you’ll also learn about the pros and cons of payday loans in these circumstances and whether it’s the best cash advance option for you.
How to get a payday loan during the pandemic
For starters, payday loans aren’t as popular as they were a few years ago. Only about 31 states allow payday loans while the rest have banned the loan structure at varying levels. So, you may need to check with your state loan policies to see if payday loans are allowed.
If so, you can visit payday loan stores near you or access a lender app from your mobile device. Applying for a payday loan can be done through an application form with the lender. Since payday loans are unsecured, you don’t have to worry about collateral when applying for a loan.
Applying for a payday loan during the pandemic, or at any time, requires that you have a current job. You will need to submit your payment stub and authorize your lender to transfer the amount electronically or you can write a post-dated check for this amount.
Common payday loan terms
Payday loans are a special form of financing because they differ from most conventional loans. Here are the common loan terms you should expect when taking out a payday loan during this pandemic.
- A short payment period: Most people refer to payday loans as a two-week performance loan. Indeed, the time window for reimbursement is very short, generally not exceeding two weeks.
- High interest rate: It is best to calculate the interest rate for payday loans using the annual percentage rate (APR). Most loans have an average APR of 400% or more, which makes them very expensive.
- Single payment: Unlike most loans, you cannot repay your personal loan in installments. All payments are usually made at once on the next payday.
What happens if you can’t repay your payday loan?
Most of the time, borrowers are unable to complete the repayment of their payday loan. Usually, the lender tries to cash the check or make an electronic transfer. If you have an insufficient balance, your bank will charge you an overdraft as often as it happens.
If you continue to default, lenders may keep calling, contacting relatives, or handing you over to collection agencies. To avoid this, you can contact the lender to offer extended payment plans if you think you won’t be able to meet the payment due date. Most lenders are generally open to this feature. You can also take out a debt consolidation loan or declare bankruptcy if you are truly unable to repay the loan.
In extreme cases, after a long period of default, the lender may seek a settlement requiring the borrower to pay less than agreed. Since the interest is usually exorbitant, the lenders end up losing nothing. However, this can ruin your credit score.
Alternatives to payday loans
If you decide that payday loans aren’t the ideal option for you during a pandemic, there are several alternatives you can try. Here are some other types of emergency loans without the drawbacks of payday loans.
- Bad Credit Loans: These loans are ideal for times of emergency, especially if you have a low credit rating. They are secured unlike payday loans and they have lower interest rates.
- Cash Advance Apps: Cash Advance apps are mobile software that can offer loans in anticipation of future income. Although they also charge by APR, they are cheaper and won’t put you in a debt cycle.
- Lending Circles: Instead of getting payday loans with ridiculous repayment terms, you can pool resources from family or friends with little or no interest.
- Pawnbroker: This type of loan requires you to provide collateral in exchange for a loan. If you pay as agreed, your property will be returned to you. This process is less expensive than payday loans.
Final Thoughts on Payday Loans
While payday loans are undeniably useful for emergency financing, they leave you with more than just a debt to settle. This is why many financial experts advise borrowers to avoid loans. If you’re already in this one and the pandemic is affecting your ability to pay, you can follow one of the recommended steps in this article. Otherwise, you better look for other emergency loan options.