There are many myths about microfinance activities. For example, the misconception that only drug dealers or and gamblers use these types of loans. In this article, we will explain why payday loans are not something scary or dangerous. You'll also learn more about how microfinance organizations operate and what rights and obligations borrowers have.

How Do Payday Loans Work and How to Borrow Safely?

Microloan offices can be found in most cities throughout the world. Their services are wide and can involve lending cash or providing a credit card to the borrower.

Suppose you are in a very difficult financial situation: due to a pandemic or job loss, your income has decreased rapidly. Your salary has been delayed and there's nothing left to live on. Borrowing from friends or family isn't an option. In this situation, you might consider a payday loan, cash advance or line of credit.

What is MoneyZap and What Does It Do?

One option to consider is MoneyZap. We asked Frank Glemstone, a financial writer who is currently one of the key members of MoneyZap money borrowing service itself.  

Imagine a neighbor who is willing to lend you money. He is not really interested in your level of income and trustworthiness but he is happy to lend you money "before the paycheck." The only condition is a high percentage interest rate. This is how microfinance organizations like MoneyZap offers payday loans work.

Provides Loans to Citizens With Small Businesses

Some MFIs can be located in big cities or sparsely populated places where there is only one branch of the bank. However, it is easier and faster to take out a small debt online. Often, it is certainly a single way to get urgent money.

Gives Out Small Amounts for a Short Period

If you wish, you may borrow a million dollars as the organizations' regulations allow this. Usually, the volume does not exceed several salaries at once, and the return period is about two months.

Sets a Higher Interest Rate

Interest rates are many times higher than bank rates. Often it takes 1% per day and adds up to 365% per annum.

Not Very Strictly Evaluates Client's Solvency

It is very easy to make money from MoneyZap for this reason. It is not necessary to prove your income as a bank requires.

How Do Payday Loans Work?

If you need to get a loan quickly, Payday loans can be an invaluable tool for accessing cash. These types of loans can typically be obtained through an online provider or at a brick-and-mortar store. To determine your rate and terms, your lender will potentially request a credit check to view your credit score.

When you get approved for a payday loan, you give your lender a check dated payday, which it can deposit on the next payday. If you borrow online, you allow the company to withdraw funds from your bank account after your employer pays you. Payday loans can sometimes seem too good to be true as they are more affordable than a personal loan or credit card cash loan. But if you're not careful, payday loans can be dangerous; high rates and fees cause many borrowers to become insolvent or fall into a debt cycle which can cause their credit scores to plummet.

Your credit score is not important for payday loans. The lender has the right to take payment from your bank account when you receive your next paycheck. Thus, payday lenders minimize the risks on their part. They may also base your loan principal on a percentage of your planned income.

Why Should Someone Take a Payday Loan?

Payday loans help you get the cash you need quickly, making them an attractive option for borrowers with bad credit or poor financial history. Here are a few reasons why someone may get a payday loan:

  • Immediate holiday shopping: a payday loan might seem like a convenient way to immediately get the cash you need for last-minute holiday shopping;
  • Emergency expenses: Expenses such as unexpected medical care can take a toll on your finances. For people with bad credit, a payday loan may seem like the best option to pay for a hospital stay or a car overhaul;
  • Cash with bad credit: if you don't meet the credit requirements for a loan, payday lenders tend to demand less from borrowers regarding financial health and creditworthiness.

How to Pay Off a Loan Before Payday?

Once you submit a dated check and receive loan approval, the full payment (including interest and fees) will be made on your next payday. If your check is not paid or you cannot pay the full amount on payday, you will have to carry the loan over to the next payday increasing the interest in the process.

How Do Payday Loans Affect Credit History?

If your lender does not require a strict credit check, you can pay the full amount by the due date. A payday loan will generally not have a negative impact on your credit. If your lender requires a tough credit check, you may notice that your credit score will drop a few points. However, if your check is not returned or you cannot pay the balance in full on payday, the amount may be sent to a collection agency. Otherwise, it will negatively affect your credit history.

How to Choose the Best Option?

If you need money urgently, then use the following criteria to determine which alternative quick money method is appropriate:

  • Loan with the lowest interest. You may find it easier to repay a loan if it has a lower interest rate. Generally, terms could be negotiated for the lowest interest rates on loans from family members and close friends.
  • Possibility to increase your credit. It would be better to build credit before getting a loan. However, if this option is not possible, it may be getting a loan from a financial institution that will help you obtain a loan. An alternative loan from a credit union may be the best way to get fast cash while improving your credit history.
  • Possibility to repay a loan subject to its terms. Regardless of the lender you use, you can get into trouble if you don't have a loan repayment plan while meeting the terms and conditions. The crucial step in understanding which loan is right for you is finding the type of loan you can afford.

Before getting a payday loan, check with credit unions about loan options to find a suitable affordable rate. Each style of loan has its own downside and it own unique benefits. Make sure you know what you are signing up for before applying for a payday loan.