What Are Payday Loans and How Do They Work?
Payday loans are short-term loans that might help you in covering immediate cash requirements until you receive your next pay. Fast payday loans online are high-cost, small-value loans that normally come with annual percentage rates (APRs) of more than 100%. Repayment must generally be made within less than a month, which is typically on the next payday.
Payday loans are not to be taken lightly. They are often very difficult to repay and if you’re not careful, you could end up paying much more than you initially thought. Before applying for one, you should know exactly what you’ll get and what you’ll need to do in return.
How Does a Payday Loan Work?
A payday loan works differently than consumer and personal loans do. You may be able to get a payday loan with a payday lender via a physical branch or online depending on where you live.
Laws surrounding payday loans differ between states and determine how much a lender can charge in fees and interest how and much can be borrowed. Some states don’t allow payday loans at all.
Once you have been approved for fast payday loans online, you may be paid in cash or with a check, or the money may be deposited into a bank account. You would then have to pay back the full loan together with the finance charges by the due date. Which is normally on the date of your next paycheck or within 14 days.
Payday loans have a finance charge, which is normally based on the amount you borrow. As the repayment term for a payday loan is very short, the costs translate to a hefty APR. The Consumer Federation of America states that the APR for a payday loan is normally 400% or more.
Despite this high cost, about 2.5 million American households use payday loans every year. This popularity is due to a number of reasons. One reason is that most people who use a payday loan can’t get any other type of financing. They may have no income or poor credit, which will prevent them from qualifying for a personal loan that offers better terms.
Another reason may be fear of or a lack of knowledge about other options. Some people for example don’t feel comfortable asking friends or family members for help. Although there are alternatives to small “payday loans online no credit check”, they are often difficult to find.
Many people simply use payday loans because they’re so easy to get. According to the Consumer Financial Protection Bureau (CFPB), there were more payday lender outlets in 36 states than McDonald’s had locations in all 50 states in 2015.
Payday lenders need very few details before they approve a loan. Most don’t do credit checks or even ask if the borrower will be able to repay a loan. All that is normally required is identification, a steady paycheck, and a bank account in good standing.
How Much Can I Borrow with a Payday Loan?
According to the CFPB, payday loans are on average $350 for a two-week period. Depending on the state’s laws, payday loans can however range between $50 and $1,000. 32 states currently permit payday lending with the maximum loan amount being capped. Utah, Maine, Wyoming, and Wisconsin don’t have caps. Montana and California have the lowest cap amount at $300, while Illinois, Idaho, and Delaware have the biggest at $1,000.
Some states, including New Mexico and Nevada, limit payday loans online to 25% of the monthly income of the borrower. In the 32 states where payday lending is allowed, the maximum loan amount, fees, and the cost of the loan are capped.
It should be noted that only 37 states have statutes that specifically permit payday lending. Some states don’t have specific statutory provisions for payday lands and/or require that lenders comply with consumer loans’ interest rate caps.
How Much Does a Payday Loan Cost?
The fees associated with a payday loan are determined by a state’s laws with costs ranging between $10 and $30 for each $100 that is borrowed. The cost for a payday loan of two weeks is typically $15 per $100.
For example, if you borrow $100 for a payday loan that lasts two weeks and the lender charges a $15 fee for every $100 borrowed, this is a 15% simple interest rate. However, as you have to repay the loan in 14 days, that 15% finance charge is equal to an APR of nearly 400% due to the loan length only being 2 weeks. The daily interest cost on a two-week loan is $1.07.
For a loan term of one year, that would be multiplied by a full year, and it would cost you $391 to borrow $100. The lender must disclose the APR before a borrower agrees to a loan. Although it’s normal to get an APR of about 400%, some payday loans have APRs as much as 1,900%. Credit card APRs by comparison typically range between 12% and 30%.
How Are Payday Loans Online Repaid?
Payday loans generally need to be repaid with a single payment by the borrower’s next payday. As lenders have different repayment terms, you will need to check for the date in the agreement or ask for the specific due date.
There may be a few options to pay off the debt, depending on the lender:
- Via check on the next payday
- By a postdated check when the loan is granted
- Via a direct bank account debit
- Online via the lender’s website
- Any other form of credit
If the loan is not repaid on its due date, the lender can withdraw money electronically from your bank account.
Many payday loan borrowers can unfortunately not repay the loan by the due date. According to the CFPB 20% of borrowers taking payday loans default on the loan, and over 80% of payday loans are re-borrowed or rolled over within 30 days.
What Are Rollover Loans?
When permitted to do so by state law, some payday lenders offer a renew or rollover feature on their “small payday loans online no credit check”. If a loan is due to be paid soon, the lender will renew the existing loan or allow the existing loan balance to roll over into a new loan.
The borrower will therefore only pay the fees while the due date for the bigger loan balance is extended. This allows borrowers more time to fulfill their agreement and repay the loan. However, it does also mean they will rack up big fees if they continue doing this.
Can Military Members Take Payday Loans Online?
Active-duty service members or the dependents of one are protected by the Military Lending Act (MLA). The extended protections afforded by the MLA include a Military Annual Percentage Rate (MAPR) cap of 36% to a wide range of credit products, including vehicle title loans, payday loans, deposit advance loans, refund application loans, unsecured open-end lines of credit, and installment loans.
This cap also applies to fees added on for ancillary products related to credit, including certain participation and application fees as well as finance charges.
What Effect Do Payday Loans Have on Credit?
As payday lenders normally don’t do credit checks, applying for payday loans doesn’t affect the borrower’s credit score or show on their credit report. Payday loans also don’t show up on a credit report after the loan has been accepted. This means they won’t help borrowers improve their credit scores.
However, if a loan becomes delinquent, it may appear on a credit report if the lender sells the account to a collection agency. Once a collection agency has purchased a delinquent account, it may report it to credit reporting bureaus as a collection account, and this will damage the borrower’s credit score.
What Options Are There to Pay off Payday Loans?
Even if you have bad credit, one option to help you in repaying a payday loan debt is debt consolidation. Although the approval requirements for debt consolidation loans for bad credit are stricter, they normally charge much lower fees and interest rates than payday lenders do. They also normally offer longer repayment periods, giving you more room to breathe.
As a consolidation loan typically has a longer repayment term and a lower interest rate, your monthly payments will be lower and this will help manage your debt repayment. The debt will also show up on a credit report, and as long as you make loan payments timeously, it will help improve your credit score.
How To Find out If a Payday Lender Is Licensed in A Specific State
Although not all states permit payday lending, those that do, oblige payday lenders to be licensed. A payday loan is considered void if it is made by a lender that is not licensed. This means that the lender won’t have the right to require that the consumer repays the payday loan or to collect.
Every state has different payday loan laws, including whether they are made available online or via a storefront payday lender. You will be able to find information about licensing through your state’s state attorney general or bank regulator in states that permit payday lending.
Are Payday Loans Worth the Risk?
Payday loans can solve an urgent requirement for funds in an emergency situation. As payday loans normally have a very high APR, you may however get caught in a vicious cycle of debt if you’re not able to pay it back on time.
The bottom line is that it’s crucial to consider all options before resorting to a payday loan.
What Are Payday Loan Alternatives?
You shouldn’t have to use a payday loan in most cases and there are several alternatives that will save you money while still meeting your needs. Consider these “payday loans online” alternatives:
Credit Cards for Bad Credit Borrowers
Many credit cards that are aimed at people that have bad credit need a security deposit, which won’t help if you are short of cash. However, some credit card issuers do offer unsecured credit cards that have low credit requirements.
Retail credit cards are for example often a good choice for people that have bad credit. Although they normally have a very low credit limit, many of them may be used in places other than the store.
Friends or Family
It is never fun to ask a loved one for financial assistance. However, if the alternative is spiraling deeper into debt, it may just be worthwhile. To avoid damaging relationships, ensure you draw up an official agreement and then stick to it.
Bad Credit Personal Loans
There are specialized personal lenders that work with people that have bad credit. Whether you need to consolidate debt, cover an emergency, or cover basic expenses, you can normally get the money you need.
Although the interest rates will be higher than on other types of personal loans, they will be much lower than what you’ll be able to get with payday loans.
Understand the Options
Although a payday loan will help a borrower with short-term money when they require it, they’re not the only option around. If you’re in a situation where you need cash fast, ensure you look at all the options before deciding on one that may ultimately make your life a lot more difficult.
If your credit score is bad, check your credit report and score to determine where attention is required. In some instances, there may be wrong information that will boost your credit score if it is removed. Whatever you decide to do, look for ways by which you can improve your credit score, allowing you to have more affordable and better borrowing options in the future.