What Are Payday Loans?

Ruchi Jaiswal  - Content Editor At The Island Now

Need some extra cash? You’re not alone. A payday loan may be the solution you are looking for. This small, short-term personal loan is meant to bridge the gap between paydays or help you with unexpected expenses. Your bank account will be directly debited when your next paycheck arrives.

Thus, it’s easy to understand why most people use it for those sudden expenses that everyone encounters from time to time.

Before jumping into everything about payday loans, it’s important to understand their features, how state laws affect them, their costs, and how they work.

Features of Payday Loan

  • Loans Are in Small Amounts

Payday loans are small loans that are offered in small amounts. Besides, they are short-term and given to borrowers to meet emergencies/unexpected expenses. You cannot use the loans for long-term financial needs. In other words, you can’t use them as a substitute for your regular income or funds. Once you pay off your loan, you can apply for another one if you need more money.

  • Single Repayment

The repayment is due on the next payday after you receive your loan. For instance, if you apply for a $500 loan and receive it on Monday morning and payday falls on Thursday, you’ll have to repay the $500 plus interest.

It is essential to remember that this method of repayment can be risky if something unexpected happens between now and your next paycheck. If something comes up and prevents you from paying off the loan as expected, it may be difficult to get another one.

  • Repay Electronically or Write a Check 

After loan funds have been received, you may repay the full amount of your loan by authorizing the lender to electronically withdraw money from a prepaid card account, credit union, or bank. You can also write the lender a check for your full balance and fees at any time after your loan has been approved.

  • Lenders Don’t Consider Repayment Ability

Payday lenders don’t consider your income or ability to repay the loan. They only consider you if you have an active prepaid card, credit union, or bank account. If this is the case, you can apply for a payday loan online and get approved instantly.

The whole process is completely online. Hence, there won’t be any hassle when going into a store or waiting in line at a bank with other customers.

  • You Get the Loan Proceeds Via Check, Cash, or on Your Prepaid Debit Card

If you apply for a payday loan, you can get the loan proceeds via check, cash, or loaded on your prepaid debit card. The payment method will depend on the financial institution where you apply for the payday loan. You should also find out whether any additional fees are involved in getting the loan proceeds via check or prepaid debit card.

Payday Loan Cost

The payday loan cost is determined by two factors: how much you borrow and the fees associated with your loan. Following the consumer financial protection bureau, payday loan fees range from 10$ – 30$ for each $100 you borrow. Additionally, there are numerous restrictions on the interest rates that can apply to these loans. Many states cap the maximum loan and fees so borrowers can pay back their debts without falling into an endless cycle of debt.

Why Are Payday Loans So Expensive?

The loans are so expensive because they are made to be short-term loans, usually for only two to four weeks. The loan amount is usually a few hundred dollars, and the interest rate is often higher than what most loans charge. Payday lenders have to make this money back within the duration.

The other reason these loans are so expensive is that they are unsecured. The borrower shouldn’t have to put up collateral if they default on the loan. Hence, reducing the risk for the lender and increasing costs.

Payday lenders charge such high rates because they know their clients will pay off their debt quickly. Therefore, they can afford to charge a lot per month without losing too much money over time.

The loan isn’t a good solution for long-term debt, though. The loans are designed for emergencies and should only be used as a short-term fix for emergencies such as car repairs or medical bills. If you use them for anything else, like paying off your credit card bills or other debts, you could end up paying more than double what you borrowed.

Your State Law May Prohibit, Regulate, or Permit Payday Loans

The payday loan industry is complex, with many different state laws that affect how the loans work. If you’re interested in getting a payday loan, it’s important to know where you live and what laws your state has enacted regarding payday loans.

Some states allow payday lending but regulate it, meaning borrowers must meet certain requirements before getting a loan. For example, some states require that borrowers have an income or checking account to qualify for a payday loan. Other states allow payday lending but do not allow any fees or interest on the loans.

Some states prohibit payday lending entirely, and thus lenders cannot offer credit to residents of those states. Therefore, if you reside in a place where payday lending is prohibited, you will not be able to get a payday loan from any lender.

Finally, some states permit payday lending without any restrictions on it at all. The lenders can offer whatever terms they want when giving out loans in these states. Therefore, it is important to know your state before applying for payday loans.

Protections for Service Members

If you’re part of the military and are facing a financial emergency, it’s important to know that you have special protections under the Military Act. These protections, which also apply to your dependents, include a 36% cap on Military Annual Percentage Rate (APR) and other restrictions. For example, many lenders are prohibited from charging interest on payday loans.

If you have plans to take out a payday loan or are already in debt with one, reach out to your local Judge Advocate General (JAG) office for help. JAGs are the legal representatives of the military and can help you understand what protections you have when it comes to loans.

How Do Payday Loans Work?

First, you fill out the registration form online or at the company’s office. This form will ask for personal information like your name, address, and contact details. You’ll need to provide your bank account number and confirm you are over 18 years old to get a payday loan. Moreover, you’ll also verify your identity by providing identification documents. You’ll prove that with documents like your most recent pay stubs or tax returns if employed. The lender will look at this information and assess whether or not it believes you can afford the loan.

The amount of loan you can apply for varies depending on your state’s laws regarding payday loans and the caps placed on them by the state legislature. The amount payday loan borrowers can apply for is determined by state laws. In most states, the maximum amount you can borrow is $500. However, some states allow loans of up to $1,000 or more. For instance, if you come from a state with a high cap on payday loans, you may be able to take out a larger loan than someone living in a state with lower caps.

You’ll know if you’ve been approved or denied within 24 to 48 hours. If the lender approves your loan request, you should receive the money in your bank account before the next payday. If they deny your application, they will let you know why and may provide other options for getting a cash advance.

It’s important to remember that the loans are meant to be repaid on your next payday. If you can’t repay the whole amount of your loan, you may be able to renew it for another period. It might also not be wise to take out a payday loan if you can’t afford the payment within the stipulated time.

What to Look For in a Payday Lender

Payday loans can be a great option if you’re in a tight spot and need to make ends meet. However, not all payday loan lenders are equal. There are many things to look for when comparing payday loan services to find the one that’s best for your needs. Here are important factors to consider when looking for a payday lender:

  • Reputation

Check out online reviews about any lender before choosing them for your loan. You can get reviews on sites like Yelp and Google Reviews. You can also ask around at work or among friends who have taken out loans before. This way, you’ll learn how trustworthy and reliable each lender is. Pay special attention to complaints about customer service or failure to get the money on time. These issues can put your financial situation at risk if they happen often.

  • Low-Interest Rate

The interest rate on a payday loan is usually higher than what you’d pay on a credit card or other type of loan. When shopping around for a payday lender, make sure they offer competitive interest rates. Hence, you won’t pay more than expected for your loan. Ensure the lender you choose offers an annual percentage rate (APR) that isn’t higher than 35%.

  • Easy Application Process

Payday lenders don’t have time for long applications or credit checks. They need to move quickly so their customers can get their cash as soon as possible. The application procedure should take no more than 15 minutes. Moreover, you should be able to submit everything online without having to visit any storefront location.

  • Repayment Time

The length of time that it takes for you to repay the loan is one of the most important factors to consider when choosing a lender. Some lenders allow repayment terms as short as two weeks, while others offer longer periods, up to four weeks. Make sure the lender provides flexible repayment terms. This will allow you to pay off your balance soon enough without incurring extra fees or penalties.

  • Maximum Amount Offered

The maximum amount offered varies from one lender to another. Your ability to repay the loan without causing undue financial hardship for yourself and your financial status will determine what you’ll receive. Some lenders offer smaller amounts than others. Ensure you shop around until you find one that gives an amount that fits your budget.

Payday Loans Alternatives

A payday loan can be a lifesaver if you need some cash urgently. The high-interest rates they carry make them a poor choice for short-term borrowing. If you need money, there are suitable payday loan alternatives. Here are some options:

  • Borrow Friends/Family

If you have good credit and have already used up all your available credit cards, you may be able to borrow money from friends or family members who trust you to repay them. However, this option isn’t always available, and it’s important not to take advantage of someone’s generosity — even if they offer. It’s also important not to borrow money from someone who may be financially unstable, like a relative who recently lost their job. In addition, it could hurt your relationship if you don’t repay the loan on time or in full.

  • Peer-To-Peer Lending

Peer-to-peer lending is when individuals lend money directly to one another rather than through banks or other financial institutions. This method allows borrowers to get lower interest rates than traditional lending options. Besides, no intermediary takes a cut of each transaction. Peer-to-peer lenders also won’t check your credit score before approving you for a loan. It’s a big plus if yours isn’t very good!

  • Paycheck Advance

A paycheck advance is a type of payday loan. It’s an alternative to traditional payday loans, where you borrow money from your employer instead of a lender. This can be an amazing choice for people who want to avoid payday lenders or cannot obtain loans due to poor credit. Paycheck advances are typically less expensive than payday loans and may come with lower interest rates.

You should avoid taking out more than one paycheck advance at a time. These loans will take away a large chunk of your monthly paycheck until you pay it off. Besides, it could take months or years depending on how much money you borrow and how much interest compounds on loan each month.

  • Borrow From a Credit Union

Credit unions offer small personal loans with competitive interest rates. Besides, you can borrow without collateral or a credit check. Credit unions typically charge lower interest rates than most banks. They’re not-for-profit organizations. They serve their members’ financial needs by offering savings accounts, checking accounts, and low-cost loans at reasonable interest rates. Check out your local credit union’s website to see if it offers personal loans. Still, you can call them directly to learn more about their loan programs and eligibility qualifications.

  • Bad Credit Loans

If you have bad credit or no credit, you probably won’t qualify for a traditional loan from a bank or credit union. However, it doesn’t mean you have no other options. You can go for a bad credit loan from an online lender that specifically caters to those with poor or nonexistent credit scores. These lenders offer short-term loans with higher interest rates than traditional lenders. They assume more risk when extending money to borrowers with no or low credit histories and therefore are higher-risk investments.

  • Local Churches and Charities

Another option is working with a local church or charity group for assistance when funds are low. Many churches offer emergency assistance programs for low-income families. These include funds for rent and utility payments or medical expenses. Some smaller charities work directly with individual families to provide financial assistance when needed. However, these organizations usually require proof of need before helping you. These programs are often free and don’t require any paperwork or credit checks. Ask at church or in your community to see if anyone knows about one near you.

Benefits of Payday Loans

  • Fewer Requirements

Payday loans are generally easier to get than many other types of credit. You don’t have to provide a lot of paperwork. Moreover, your credit score does not matter; you don’t have to worry about getting approved for a certain amount or type of loan. All you need is proof that you have enough income to cover the payment and that you are over 18 years old.

  • Easily Accessible

Payday lenders make it easy to get cash quickly. Thus, you can pay for expenses that come up unexpectedly and don’t have time to wait for traditional financing options. Traditional lenders aren’t always able to give out money within minutes. However, many payday lenders offer same-day funding if you’ve already been approved for the loan amount and terms that meet your needs.

  • Best for Emergencies

Payday loans are especially useful when you are in a financial bind and need money immediately. A payday loan can be helpful if your car breaks down or you have an unexpected medical bill to pay. Paying back the loan might be difficult, but at least you can access some funds. Hence, you can pay your expenses without waiting until paycheck day rolls around again.

  • Fast Application

Payday loans offer fast application processing. Some are online lenders, allowing you to apply online and receive an answer in just minutes. You can also fill out your application at home, print it out, and take it to the store for review by a representative. This can save you time if you have a busy schedule or work long hours during the day.

  • Flexible Loans

The loans are also flexible regarding the amount of money they give out each month. You can apply for any amount from $500. However, it can be more or less depending on the lender. Consider your financial requirements and repayment ability before you go for payday loans. The lender will take into account your monthly income before approving the loan. However, some lenders offer high cash advances depending on their policies and regulations.

  • No Collateral

Payday lenders don’t require collateral for their loans, so you don’t have to worry about losing your car or house if you can’t pay back the money when it’s due. However, other costs are associated with borrowing money through these lenders, like high-interest rates. Ensure you understand them before agreeing to borrow funds from this type of lender.

Frequently Asked Questions About Payday Loans 

  1. Can a payday loan affect my credit report?

Yes, a payday loan can affect your credit score. If you default on a loan, the lender will report it to the credit bureaus. That will hurt your score. However, if you pay off your loan on time, there should be no problem. The short-term nature of a payday loan makes it unlikely that you’ll be able to pay off the full amount before the due date. So if you need a longer-term loan and have good credit, consider applying for one instead of taking out another payday loan.

  1. Are payday loans hard or easy to pay back?

If you are thinking of a payday loan, you may wonder if it will be difficult to pay back. The truth is that payday loans can be easy or hard to pay back. The loans are quick and convenient, which is great if you need money fast. They also don’t require much paperwork or credit checks, so they’re easy to get approved for if you meet the requirements set by each lender.

Unfortunately, payday loans can cost you more than just interest fees. For example, many lenders charge additional fees if you miss a payment or have insufficient funds in your account when attempting payment. These fees can add up quickly and make it difficult for some borrowers to repay their loans on time without incurring additional costs.

  1. Is a payday loan a good idea?

If you have less cash and desire to make ends meet until your next paycheck arrives, the loans are a good idea. They are one of the few options available. Besides, they’re better than bouncing checks or going into debt with high-interest credit cards that may hurt your credit score. However, if you think this might be an ongoing problem for you or if there’s any chance you won’t be able to pay back the loan within 30 days, avoid it. You should therefore look into other options instead.

There are many reasons these loans can be a bad idea, but the biggest one is that they are costly. You will end up repaying a lot more than what you borrowed. You’ll owe more money if you can’t pay it back in time. The loans have very high-interest rates. If you don’t pay off your loan early enough, you may pay thousands of dollars in interest on just $100. So really, they’re not worth it unless there’s no other option available.

  1. What happens if I cannot repay a payday loan?

If you cannot repay a payday loan debt, you should not ignore the debt. The best way to deal with an outstanding payday loan is to contact the lender and work out a repayment plan. Talk to the lender as soon as possible, so they do not report your loan as delinquent.

If you cannot agree with the lender, they may report your loan to credit bureaus like Experian, Equifax, and TransUnion. This will awfully influence your credit score and make it difficult for you to obtain future credit.

The lender can also take legal action against you for nonpayment of the debt. The most common method used by lenders is “garnishment.” It involves taking money from your bank account or paycheck until you fully pay the debt.

Finally, if you fail to repay a payday loan debt, it is always possible to be turned over to collection agencies for collection purposes.

Conclusion: What Are Payday Loans? 

One thing to be aware of when going into a payday loan is the high cost that you typically have to pay back within the next payday. If you believe that will be a problem, you may end up paying more in interest than the principal, so it can be best that you find another solution. You can also refer to the best personal loans, best instalment loans and no credit check loans.

You should not take out a new loan if you already have trouble paying one back since this only worsens things. These loans should only be used as an emergency measure or if you have no other option to pay for something important on time (like rent).

As payday borrowers, you can allow the lending company to withdraw the money from your account or post-date a check to match the next payday. If you decide to have the funds withdrawn from your account, it will happen automatically on payday. If you use a check for the loan, you must write it in favor of the lender and include your routing and account numbers.

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