Payday Advance Loans

There are many different types of loans available in Canada, and one of the more popular for short term are payday advance loans, or cash advance loans. This is largely because they are easy to obtain and often require no credit to acquire. However, there are some major cons when it comes to payday advance loans and they should be avoided.

What are payday advance loans? A payday advance loan is a small (usually $500-$1000) short term loan. When you take out a payday advance loan, you agree to pay back the loan, plus a substantial fee by the time your next pay cheque is received. Usually payday advance terms are 1 week, 2 weeks or 1 month, depending on your pay cycle. Most companies offer these loans and ask only for proof of regular employment – no credit checks are done.

How do payday advance loans work? Say you need an extra $500, and so you go to a payday lender for that amount. You provide some information along with a post-dated cheque (for the end of the term) and receive the money. At the end of the term the loan can be paid off in cash and the cheque voided, or the lender will deposit the cheque and it will come out of your bank account.

The reason that many people turn to payday advance loans is to pay an unexpected bill or to catch up on monthly payments, but this can often start a vicious cycle that means huge gains for the credit company but major losses for you.

Example – You borrow $1,000 for 2 weeks bearing a fee to borrow of $200; on your next pay period you must repay $1,200.00
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If you cannot pay back the total amount in the given time period you will then be required to pay expensive additional fees and sometimes interest. This can end up costing you far more than the initial loan. These companies may extend the loan repayment period at an annual percentage rate of between 400% and 5000%.

Another reason that it does not work in your favour to take out payday advance loans is because they do not report to your credit report. If you are trying to get out of debt or rebuild your credit, payday advance loans will not help. The only time that they do report to your credit report is if they go to collections – and this shows up as a black mark on your credit report. To find out more about credit reports, please click here.

If you are in debt or are having trouble making payments, there are several alternatives to payday advance loans that you should take advantage of.