What Is a Payday Loan?

How do payday loans work?

When you apply for a payday loan, the lender will likely ask you about your employment and income as well as your typical pay period cycle. You can then fill out a short application, provide any required documentation as evidence of your income, and receive your funds for a small fee.
After loan approval, you will typically receive your money in the form of cash, although direct deposits are becoming more common. The money must then be repaid within the agreed upon time period, which is typically 14 days to mirror the most common employer pay period.
Most lenders require some form of prepayment authorization or postdated check so that they can automatically collect your funds once your next paycheck hits your account.

Are payday loans fixed or variable?

Since payday loans are designed to be paid back relatively quickly in one lump sum payment, they are typically processed with a simple fixed rate finance charge to borrow the money. This fee is regulated by the state and will vary based on your location, but typically ranges anywhere from 10%-30%. In addition, this fee is usually expressed as a flat fee (i.e. $15 per $100) as opposed to a traditional interest rate percentage.

Is a payday loan secured or unsecured?

Payday loans are unsecured loans, meaning they are not secured by any type of collateral and do not require you to put any kind of asset down as a deposit or insurance against your loan.
However, while you do not need to put up any kind of collateral to take out a payday loan, you generally do need to provide access to your bank account as well as proof of your current income. Most payday loan lenders will require you to leave them with either a post-dated check or the permission to automatically complete a withdrawal from your account on the date of your next paycheck.

What is a direct payday loan?

A direct payday loan is any payday loan taken out directly through the lender, whether online or in person, versus using a broker or website that takes your information and distributes it out to multiple lenders. To avoid having your personal and financial information abused, try to seek out a direct payday loan instead.

How is a payday loan different from a regular loan?

One of the major ways that a payday loan is different from a regular loan is that it is paid back as a lump sum and not in installments. Regular loans are paid back in equal monthly installments over a longer period of time, whereas payday loans are typically paid back within just a few weeks and must be paid in full. Interest rates also tend to be much higher with payday loans, and the cost of borrowing the money can be as high as 30% in some locations.

Can you get a payday loan without a bank account?

Many Americans do not have a bank account. Are they still eligible to receive a payday loan?
While it is possible to get a payday loan without a bank account, it may be more difficult.
In general, payday lenders just want to see that you have the means to pay back the loan. This means that their most important focus is on making sure that you have the regular income coming in to make the payment. Because payday loans are small, short-term loans, payday loan lenders do not typically run credit checks or require a certain credit score or income.
However, since many lenders require a bank account to set up a pre authorized loan repayment, this may pose a problem. If you do not have a bank account, you will likely need to leave a signed and postdated check for the lender to process on your next payday.

How long do you have to pay back a payday loan?

Payday loans are designed to be short-term, temporary financing products. Usually, payday loans are based on your pay period and when you receive your next check. While employer's paycheck cycles can vary, payday loans must typically be paid back after just 14 days.
However, in the event that you cannot repay within this time frame, your payday loan can potentially be rolled over to the next pay period for an additional fee.

How much does a payday loan cost?

Payday loans typically come with a cost to borrow the funds of around 15%, although fees can vary from 10% to 30%. These fees are regulated by each state, and a list of state-by-state lending statutes can be found here.
For example, if you are going to borrow $200 in the state of California from a payday loan lender, you will need to repay an amount of $230 to account for the maximum allowable finance charge of 15% (or $30).

Are payday loans easy to get?

Payday loans are fairly easy for most consumers to get, which is one of the reasons why they are such a popular option for small amounts of fast cash. In most cases, a payday loan can be obtained from a payday loan lender by simply walking into a local office and completing an application. You may need to prove your income and employment as well as leave a post-dated check or a payment authorization on file with the lender.

What's needed for a payday loan?

To get a payday loan, you will typically need to provide documented evidence of a few things in order to complete your application. This includes an ID to prove your identity, pay stubs to prove your current income, additional proof of employment, and possibly even documentation that proves your current address.
You will likely need to appear in person and complete your application on the spot in order to leave the office with cash in hand. Most of the time you will need to have a valid social security number, bank account, photo ID, and be at least 18 years old.

Payday loan alternatives to consider

The best alternative to a payday loan is a personal loan. You can apply for a small personal loan that can help you cover your bills and other unexpected expenses in a much more efficient way than a payday loan. Payday loans can easily keep consumers stuck in a vicious cycle of debt and living paycheck to paycheck. On the other hand, a personal loan can help borrowers get ahead.
Since personal loans are a form of installment loan, the loan repayment takes place over a certain period of time with small fixed monthly payments. For example, if you need to borrow $1,200 to help cover a car repair, you can then repay it over the next 12 months at a consistent manageable payment of about $100 a month. Payday loans must be paid back relatively quickly as a lump sum payment, which can be very difficult for those who are already in a tough financial situation.
Additionally, you could borrow money from friends or family to cover the expense or consider using your credit card at an ATM to take out a cash advance.

Payday loan alternatives to avoid

One alternative that many borrowers turn to in addition to payday loans is taking out a car title loan. This is a popular alternative because it allows nearly anyone to have access to a large amount of funds fairly quickly. However, this type of loan is even more dangerous than a payday loan because now you have put an asset of yours on the line as collateral, and you can lose your vehicle if you default on the loan.
Payday loans are unsecured, meaning the worst that can happen if you fail to repay them is that your account will get sent to collections and you will receive a negative mark on your credit report. On the other hand, car title loans are secured and can result in the loss of your collateral.

How much can I borrow with a payday loan?

Consumers can only borrow so much with a payday loan. Payday loans are typically only offered in small amounts of up to $500. This is because they are meant to be temporary stop-gap measures meant to get you to the next paycheck. They are not meant to be alternatives to personal loans or fund major purchases such as a vehicle, vacation, or wedding. They should only be considered in emergency situations when you just need a little bit of cash for a bill or other expense that cannot wait until payday. In addition to state borrowing limits, you may also be limited to how much you can borrow based on your current income and financial situation.

Payday loan borrowing limits

Payday loan borrowing limits are set by the state and the maximum borrowing limits are different in each state. Most states have a loan limit of just $500, although some states allow for loans of higher or lower amounts, and a few states have no limit at all. For example, the state of Delaware allows payday loans of up to $1,000 while the state of Louisiana caps borrowers at just $350 per payday loan.
Each state also has different statutes regulating allowable finance charges. For example, in the state of California, fees on payday loans may not exceed 15%.
Both of these regulations are designed to protect consumers and keep payday loan lenders from operating with predatory lending practices.

Does paying back payday loans build credit?

The answer to whether paying back a loan will help you build credit depends on whether or not the lender reports your account and payment history to the 3 major credit bureaus.
Most of the time, payday loans are not reported to the credit bureaus unless there is an issue. Lenders of payday loans also do not run your credit, so you will not need to worry about taking a hit to your score from a hard or soft inquiry.

This means that taking out payday loans should not affect your credit in either way – positive or negative – unless you completely default on the repayment of the loan over an extended period of time. Then your account can be sent to collections, resulting in a rather significant derogatory mark on your credit report that will affect your credit score for years to come.

How long do payday loans stay in the system?

Most of the information reported by lenders will stay on your credit report for 7 years.
However, payday loans are typically not reported to the credit bureaus.
The exception is if you fail to repay your payday loan altogether, in which case your debt may be sold to a debt collection agency who will then report this failure to pay to the credit bureaus.
Collection accounts will stay on your credit report for 7 years before falling off.

What happens if I can't repay a payday loan?

There are a number of things that can happen if you fail to repay your payday loan.
If your initial check bounces or your EFT charge does not go through, you may be charged an additional fee by the lender and/or your bank. You should try to make your payment as soon as possible to avoid any further negative consequences.
In some cases, you may be able to rollover your payday loan which changes the due date for an additional fee.
If you still cannot repay your payday loan after this, the lender can eventually send your account to collections, which will then show up on your credit report for 7 years. Having a collections account on your credit report will negatively affect your credit score and your ability to obtain other types of financing, so be sure to repay your payday loan as soon as possible.

Can payday loan debt be forgiven?

Typically, if you fail to repay your payday loan your account will be reported to collections. It is not likely for your payday loan debt to be forgiven by the original lender for any reason.
In some cases, you may be able to negotiate with the collections agency to remove the derogatory mark from your credit report in exchange for the repayment of the debt.
But your best option is to make your payment to the original lender as soon as possible or negotiate a deal with them before your payday loan debt is even sent to collections.
This is one reason why many people choose to avoid payday loans altogether, because they can become increasingly difficult to keep up with and repay on time if you are living paycheck to paycheck.

Why are payday loans bad?

As mentioned above, it is easy to fall behind on payday loans. In fact, a study by the CFPB found that a whopping 4 out of 5 payday loans are rolled over or reborrowed within 30 days.
In addition, payday loans typically come with very high fees and penalties. These fees can add up quickly, especially for repeat borrowers. For example, if you are borrowing $500 every 2 weeks from a payday loan lender and paying the average fee of 15% to receive your funds, that is an additional expense of $75 every 2 weeks.

Payday loan dangers

Users of payday loans can get stuck in a vicious cycle of debt that makes it difficult to ever repay your debt on a permanent basis. Once you are far enough behind on your bills to turn to payday loans, it can be nearly impossible to get ahead. The added fees of taking out a payday loan can also accumulate over time and make a situation of living paycheck to paycheck even worse. Whenever possible, payday loans should be avoided or used on a one-time basis.
Make sure you are able to repay your loan on time and that you have thoroughly reviewed and understand the terms of your payday loan before agreeing to receive one.