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You have probably heard lender advertisements saying you may get up to $1,000 in payday loans with no hassle and credit checks. Those are popular reasons for applying, and the potential money may help you cover any unexpected expenses very quickly.

But here is what lenders are usually reluctant to say: a payday allowance can be expensive. In fact, it is a type of short-term unsecured loan with high default rates that is used for a period of two to four weeks on average. The average payday loan amount is for around $200 to $5,000 depending on the state you live in, your lender, and personal criteria. Below you can see an approximate cost breakdown of a $1,000 payday loan.

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How Much is a $1,000 Payday Loan?

To answer this question, you need to know not only the amount you want to borrow, but also the length of loan and particular limits that are set up by your state law. For instance, in some states, there could be a cap of 36% APR, while in others, the yearly interest may reach three-digit numbers and be as high as 300-700%.

Let’s say you want to know how much was your APR if you receive a $1,000 payday loan with $50 interest for 14 days. 

  • Divide $50 by $1,000 which gives $0.05
  • Multiply $0.05 by 365 which gives $18.25
  • Divide $18.25 by 14 which gives $1.30
  • Multiply $1.30 by 100% which gives 130%

As you can see, 130% of the loan size will be added to the amount itself as the annual interest. As a result, you will need to return $1,049.86 to the lender before your next payday (within 14 days). If you don’t want to do the math, you can use these free financial calculators to explore your payday loan payments.

What to Do If You Can’t Repay Your Payday Loan?

If you are struggling to repay your loan, here are a few strategies to apply:

Contact your provider: if you are close to the due date and have no cash to make payments, contacting your lender to come up with a solution would be a good idea. Most lenders can prolong the agreement to one month or more.

Consider a student loan option: you can take a federal student allowance to cover your existing debts. This type of loan usually enters default after 250 days of missed repayments. So, you will have enough time to work out a solution.

Modify your payday loan: rather than defaulting on your allowance, try to negotiate with your lender to lower your monthly installments through loan refinancing or other modifications. Also, you can consider government resources, local charities, and nonprofits created to help those in need.

Talk with your credit counselor: A licensed financial professional may help you evaluate your current position and set up a plan on how to manage your debt properly. This service is typically free to use, but some companies may charge you a fee.

What Can Happen If You Don’t Repay Your Debt?

If your bank doesn’t draft the outstanding balance on the due date, the lender will continue trying to deduct that amount. Each time the transaction is unsuccessful, your bank will charge a funds fee which takes you even deeper into a hole. 

If there is no money in your bank account, the lender will start calling you or your friends to collect payments. It may also turn over to a third-party collector, whose methods may be more aggressive than the payday provider. In the meantime, additional fees, penalties, and interest may pile up on the payday loan balance. Eventually, failing to repay the existing debts can take a toll on you as a borrower.

Impact on Your Credit

Your credit report is safe as long as you repay your loan regularly. However, once the lender sends your existing debt to a third-party collection agency, it will be added to your credit history. Due to this process, defaulting on your payday loan may negatively affect your credit.

Limit Your Ability to Accounts

In addition, the overdrafts may limit your ability to open checking or savings accounts in the future. Even though most people are familiar with credit reporting organizations, credit unions and financial institutions use different reporting agencies to screen account holders.

Sue You for the Outstanding Balance

The worst thing that may happen if you stop making payments on your payday allowance is when the lender or collection agency sues you in court for the outstanding balance. It could result in a judgment against you if the court determines that you are obligated to pay your debts. With a lawsuit judgment, the payday lender may legally get court permission to seize funds from your bank account.

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