A payday loan is a short-term unsecured loan with sometimes exorbitant interest rates. The term “payday” in the context of a payday loan refers to when a borrower sends a postdated check to the lender for the payday wage but receives a portion of that payday sum in cash from the lender.
Payday loans should not be taken lightly. They might be tough to repay and may wind up costing you far more than you anticipated if you are not cautious. Before you apply for one, you should understand what you will receive and what is expected of you in return.
For example, let’s say you borrow $100 for a two-week payday loan and your lender is charging you a $15 fee for every $100 borrowed. That is a simple interest rate of 15%. But since you have to repay the loan in two weeks, that 15% finance charge equates to an APR of almost 400% because the loan length is only 14 days.
How Do Payday Loans Work?
Payday loans work differently than personal loans and other types of consumer borrowing. Depending on where you reside, you can receive a payday loan online or in person from a payday lender.
Distinct states have different payday loan rules that limit how much you can borrow or how much the lender can charge in interest and fees. Some states outright forbid payday loans.
If you are authorized for a payday loan, you will either receive cash or a cheque, or the money will be transferred into your bank account. You must then repay the loan in full, plus the finance charge, by the loan’s due date, which is usually within 14 days or by your next paycheck.
Payday loans have a financing charge that is normally depending on the amount of the loan. Due to the short payback terms of payday loans, these charges translate to a high APR. Payday loan APRs are typically 400% or higher, according to the Consumer Federation of America.
Despite the exorbitant charges, The Economist estimates that over 2.5 million American families obtain payday loans each year. This popularity can be attributed to a number of factors. One reason is that many people who use payday loans do not have alternative options for funding. They may have bad credit or no income, making it difficult for them to obtain a personal loan with favorable terms.
Another cause could be a lack of understanding or fear of alternatives. Some people, for example, may not feel comfortable approaching family or friends for help. And, while there are alternatives to payday loans, they are not always easy to find.
Payday loans are popular because they are simple to obtain. According to the Consumer Financial Protection Bureau, there were more payday lender stores in 36 states in 2015 than McDonald’s restaurants in all 50 states (CFPB).
Payday lenders have few approval requirements. Most do not conduct credit checks or even require that the borrower be able to repay the loan. All you usually need is identification, a bank account in good standing, and a consistent paycheck.
How Much Can I Borrow with a Payday Loan?
According to the CFPB, the average payday loan is $350 for a two-week duration. However, depending on your state’s legislation, payday loans might range from $50 to $1,000. Currently, 32 states permit payday lending with a maximum loan amount cap. Maine, Utah, Wisconsin, and Wyoming have no limit. The maximum cap amount is $1,000 in Delaware, Idaho, and Illinois, while the lowest is $300 in California and Montana. In some areas, such as Nevada and New Mexico, each payday loan is limited to 25% of the borrower’s monthly salary. The cost of the loan, fees, and the maximum loan amount are all capped in the 32 states that allow payday lending.
What Are the Costs of a Payday Loan?
State laws govern the fees associated with payday loans, which range from $10 to $30 for every $100 borrowed. A two-week payday loan typically costs $15 per $100 borrowed.
Assume you borrow $100 for a two-week payday loan and your lender charges you $15 for every $100 borrowed. That is a simple interest rate of 15%. However, because you must repay the loan in two weeks, the 15% finance fee corresponds to an APR of nearly 400% because the loan term is only 14 days. The daily interest expense on a two-week loan is $1.07.
If the loan duration was one year, you would multiply it by 12 to get the total cost of borrowing $100. Before you accept to the loan, your lender must reveal the APR. While an APR of 400% or greater is usual, some payday loans have had APRs as high as 1,900%. In comparison, credit card APRs typically range from 12% to 30%.
How To Payoff a Payday Loan
A payday loan is typically repaid in a single installment on your next payday. Because lenders have different repayment terms, make sure to ask for the particular due date or check the agreement for the date.
Depending on the lender, you may have a few alternatives for debt repayment:
- When you apply, you must provide a postdated check.
- A check on your next payday on the lender’s website
- A withdrawal from your bank account
- a different type of credit
If you do not repay the loan by the due date, the lender may electronically deduct funds from your account.
Unfortunately, many payday loan debtors are unable to return their debts on time. In fact, the Consumer Financial Protection Bureau discovered that 20% of payday borrowers default on their loans, and that more than 80% of payday loans taken out by borrowers were rolled over or reborrowed within 30 days.
What Exactly Is a Rollover Loan?
When permitted by state law, some payday lenders will offer a rollover or renew feature. If the loan is about to mature, the lender will either allow the previous loan balance to roll over into a new loan or renew the existing loan.
In this case, the borrower would pay only the costs, but the due date for the bigger loan total would be pushed out. This allows the borrower extra time to repay the loan and meet their obligations. However, if they stay in the cycle, they will incur significant expenses.
What if I am a member of the military?
If you are an active-duty service member or a dependent of one, the Military Lending Act provides protections for service members (MLA). The MLA protections have been expanded to include a 36% Military Annual Percentage Rate (MAPR) ceiling on a broader range of credit products, such as payday loans, vehicle title loans, refund application loans, deposit advance loans, installment loans, and unsecured open-end lines of credit.
The cap also applies to credit-related ancillary product expenses, such as finance charges and some application and participation fees.
What Impact Do Payday Loans Have on My Credit?
Applying for a payday loan has no effect on your credit score or appears on your credit report because payday lenders rarely run credit checks. Furthermore, payday loans will not appear on your credit report once you have accepted the loan. As a result, they will not assist you in improving your credit score.
However, if the loan becomes late and the lender sells your account to a collection agency, they may appear on your credit record. When a collection agency buys a delinquent account, it has the ability to submit it to the credit reporting bureaus as a collection account, which might harm your credit score.
Are There Any Alternatives to Paying Off Payday Loan?
Even if you have bad credit, debt consolidation can help you repay a payday loan. While bad credit debt consolidation loans have stricter approval standards, the interest rates and costs are often substantially lower than those charged by payday lenders. They also provide lengthier payback terms, allowing you more wiggle room.
A consolidation loan can have a lower monthly payment to help you manage your debt repayment because it normally has a lower interest rate and a longer repayment term. Furthermore, the debt will appear on your credit record, which can assist you work on improving your credit score if you make loan payments on time.
How Can I Find out If a Payday Lender Is Licensed in My State?
Payday lending is not permitted in all states, but those that do require payday lenders to be licensed. The loan is considered void if it is made by an unregistered lender. This means that the lender has no legal authority to collect or compel the consumer to repay the payday loan.
Each state has distinct rules regarding payday loans, including whether they can be obtained in a store or online. In places that allow payday lending, you can obtain license information from your state’s bank regulator or state attorney general.
Is a Payday Loan Worth It?
In an emergency, a payday loan might meet an immediate financial need. However, because these loans typically have a high APR, if you are unable to repay them on time, you may become trapped in a debt cycle.
Bottom line: Before visiting a payday lender, explore all of your options.
What is the use of payday loans?
Payday loans are short-term loans for small amounts of money. They are available from high street shops and internet sites. Payday loans can be easy to get but interest rates are very high.
Payday loans can give borrowers with short-term funds when they are needed, but they are not the only choice. If you need money, think about all of your options before choosing one that will make your life more difficult.
Also, if you have poor credit, review your credit score and report to decide which areas want your attention. In rare situations, there may be incorrect information that, if removed, could improve your credit score. Consider ways to increase your credit score so that you will have better and more cheap borrowing options in the future.