A payday loan is a short-term loan issued by a bank or check-cashing company as an advance against an upcoming paycheck. Payday loans can be an option for borrowers who can’t qualify for other credit and need quick cash. However, payday loans are also much more expensive than most other types of consumer credit, so it’s important to understand the applicable terms and conditions before taking out a loan. You should also make sure to shop around for the best rates before you apply.
What Is a Payday Loan?
A payday loan is an unsecured, short-term loan that allows consumers to borrow against an upcoming paycheck—essentially allowing them to access their next check before getting paid by their employer. These loans typically have higher interest rates than other types of loans and are generally used by people who need cash fast and cannot get it another way.
While payday loans can be helpful in some situations, they can also be risky. This is because the high interest rates associated with payday loans can make them very difficult to repay. If you are considering a payday loan, ensure you understand all the risks involved before signing any paperwork.
Are Payday Loans Legal?
Payday loans are legal in most states. However, some states have laws regulating payday loans that protect consumers from high interest rates and other predatory practices. For example, many states impose maximum APRs. Research the payday loan laws in your state to understand your rights before taking out a loan.
How Do Payday Loans Work?
Most payday loans work by writing a personal check to the lender for the amount of money you want to borrow, plus a fee. Once you’re approved, the lender gives you cash or a check or deposits the money in the borrower’s account. The loan, including fees, must be repaid within 14 days—or on your next payday.
If you're unable to repay the loan in full on your next payday, you can often roll over the loan into a new one. However, each time you roll over the loan, you will have to pay an additional fee. This can make it very expensive to keep taking out payday loans.
Even the best payday loans are designed to be short-term solutions to financial problems. They are not meant to be used as long-term financial products. If you find yourself taking out payday loans on a regular basis, you should look into other options, such as getting a personal loan from a bank or credit union.
Payday loans are also sometimes called “cash advances” or “deferred deposits” and function in much the same way.
Is a Payday Loan Secured or Unsecured?
A payday loan is unsecured, which means it does not require collateral. This makes it different from other types of loans, such as car loans or mortgages, which are secured by underlying collateral (the car or the house). Because payday loans are unsecured, they typically have higher interest rates than other types of loans. Lenders view them as riskier because they are not backed by any collateral.
How To Get a Payday Loan
There are a few different ways to get a payday loan. The two most common are to go to a payday lender’s office and fill out an application or to apply online. Online payday loans generally offer faster funding speeds than those offered through brick-and-mortar payday lenders. This is because applying for a loan online is usually more streamlined than doing so in person.
- Online payday loans. When you apply for a payday loan online, provide your contact information, employment information, and bank account information. You will also be asked to provide some basic personal information. Once you enter this information, submit your application and await approval and funding.
- In-person payday loans. To apply in person, visit a local payday lender location, present your ID and a copy of your recent paystubs, and complete a brief application. The lender will then determine whether you qualify and arrange for you to access your loan.
If you are approved for a payday loan, the money will generally be deposited into your bank account within 24 hours. However, note that the time it takes for the money to be deposited may vary depending on the lender you use. Once the money is in your account, the funds can be used for any purpose.
Loans must be repaid by your next payday, plus any associated fees and interest charges. If you do not repay the loan by your next payday, the lender may elect to roll over the loan into a new one and pay an additional fee.
Can you get a payday loan without a bank account?
Yes, you can get a payday loan without a bank account. Some payday lenders give borrowers the option to borrow cash or receive the funds through a prepaid debit card. If you choose to receive your loan funds via a prepaid debit card, note that there may be additional fees associated with this option.
How Much Do Payday Loans Cost?
The fees associated with payday loans can be very high—much higher than other types of consumer credit. In most cases, fees are equal to or greater than the amount you borrowed. For example, if you take out a $500 payday loan with a fee of $15 per $100 borrowed, you would end up paying back $575 after just two weeks or extending your loan for an additional fee.
Because the borrowing fees for payday loans compound when they’re extended, their equivalent APRs can be many times those of conventional loans. In some cases, the fees associated with payday loans can be even higher. For example, some lenders may charge an application fee, a processing fee, and an origination fee just to get started with a payday loan.
What Are Payday Loan Interest Rates?
Interest rates on payday loans are generally much higher than those for other types of consumer credit. In most cases, the annual percentage rate (APR) for a payday loan is 400% or more. This means that if you borrowed $500 from a payday lender, you would be required to pay back $2,000 after just two weeks—or extend your loan and incur additional fees.
Some payday lenders may charge even higher interest rates. For example, some lenders may charge an application fee, a processing fee, and an origination fee just to get started with a payday loan. All of these fees add to the overall cost of the loan and can make it very expensive.
Are Payday Loans Fixed or Variable?
Payday loans are generally variable-rate loans, which means that the interest rate can change over time. This can make it difficult to predict how much your loan will ultimately cost. In addition, fees associated with payday loans may change over time. For example, some lenders may charge an annual fee, while others may charge a monthly fee.
Payday Loan Alternatives
If you need cash quickly, there are some payday loan alternatives to consider before committing to high fees and short repayment terms.
- Cash advance apps. These apps allow you to request a small amount of money—usually up to $250—from your next paycheck. The money is typically deposited into your bank account within 24 hours.
- Credit cards. If you have good credit, you may be able to get a cash advance from your credit card. The interest rates on cash advances are usually higher than the interest rates on regular credit card purchases, but they may be lower than the interest rates on payday loans.
- Bank loans. You may be able to get a personal loan from your bank. The interest rates on personal loans are typically lower than on payday loans, but you need good credit to qualify.
- Friends or family. You could ask a friend or family member for a loan. If you do this, draft a written agreement that includes the interest rate and repayment term.
Frequently Asked Questions
When is a payday loan a good idea?
A payday loan may be a good idea for people who need cash fast and can’t access it through conventional types of credit. For example, a payday loan may be a good alternative if you need to repair a vehicle so you can get to work and you don’t have enough available credit on a credit card.
Why do people use payday loans?
People use payday loans when they need to access cash quickly and can’t get it through a credit card or other low-cost financing. This is often the case in underbanked communities and among individuals with poor personal credit that disqualifies them from accessing more cost-effective forms of consumer credit.
Can payday loans hurt your credit?
Payday loans can be extremely detrimental to a consumer’s credit score, especially if they aren’t repaid on the payday following their issuance. In the event that a payday loan needs to be extended, the borrower incurs additional fees on both the original borrowed balance and any fees accrued to date.
Does paying back payday loans build credit?
Repaying a payday loan can help build your credit score. However, it’s important to remember that payday loans are generally high-interest, short-term loans. So while repaying your loan may improve your credit score in the long run, it’s still important to be mindful of the costs and risks associated with these types of loans.
How fast do you have to repay payday loans?
When you get a payday loan, the expectation is that you will repay the loan from your next paycheck. However, this isn’t always required—payday loans can often be extended for additional pay periods if you pay extra fees. However, these costs will grow over time and increasingly negatively impact your credit.
Are there options to help pay off my payday loan?
If you’re struggling to repay your payday loan, there are some options available to help you. You can work with a credit counseling service to develop a repayment plan. You may also be able to negotiate with your lender for more favorable terms on your loan. Finally, some states have laws that protect borrowers from excessive fees and interest rates associated with payday loans.
What happens if I can't repay a payday loan?
If you can’t pay back a payday loan, the lender may elect to roll over the loan into a new one and pay an additional fee. This can be very expensive and can quickly become unmanageable. In some cases, the fees associated with payday loans can be even higher than the original loan amount. Your lender may also offer extended payment plans (EPPs) that let you pay off a loan in installments.
In some cases, the payday lender may have the right to withdraw funds directly from your bank account. Many payday lenders also use aggressive collections tactics, including abusive calls—even when these attempts are illegal.
If you find yourself in this situation, it’s important to contact your lender as soon as possible to work out a repayment plan. If you don’t repay the loan, the lender may eventually turn to a collections agency to recoup their losses. This can negatively impact your credit score and may make it difficult to borrow money in the future.
Can payday loan debt be forgiven?
Generally speaking, payday loans are not forgiven. In fact, payday lenders are known for their predatory lending and collection practices. That said, borrowers are not required to repay payday loans that do not comply with state law. If you think your lender has violated state law, contact the applicable regulatory agency for more information.
Payday loan debt can also be forgiven through bankruptcy. However, filing for bankruptcy can be costly and complex—and it's not the right choice for everyone. Contact a bankruptcy attorney if you think it may be a good option.
How long do payday loans stay in the system?
Payday loans typically stay on your credit report for up to seven years. This can make it more difficult to qualify for future loans and lines of credit. However, the impact of a payday loan on your credit score will lessen over time as your other positive credit history grows.
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