What is a payday loan?
A payday loan is a high-cost, short-term loan for a small amount – usually $ 500 or less – that is meant to be paid off with the borrower’s next paycheck. Payday loans only require an income and a bank account and are often granted to people who have bad or no credit.
Financial experts warn against payday loans – especially if there is a chance that the borrower may not be able to repay the loan immediately – and instead recommend other sources of the loan.
How do payday loans work?
A payday lender will confirm your income and checking account information and deliver money to you in as little as 15 minutes at a store or, if the transaction is done online, the same day.
In return, the lender will ask for a signed check or permission to electronically withdraw money from your bank account. The loan is due immediately after your next payday, usually within two weeks, but sometimes within a month.
If the loan is issued in a store, the lender will make an appointment for you to return to the loan maturity. If you don’t show up, the lender will execute the check or withdraw the loan amount plus interest. Online lenders use electronic withdrawal.
What is a direct payday loan?
Online payday loans can go through a direct lender, who makes their own lending decisions, or a broker, who sells your loan to the highest bidder.
Choosing a lender who uses a broker is riskier because you don’t know who you are giving your financial information to. Not only is there a greater risk of fraud and unwanted solicitation from a broker, but it can also increase the overall cost of the loan.
If you need to take out a payday loan, choose a direct lender.
How much does a personal loan cost?
The cost of a loan from a payday lender is typically $ 15 for every $ 100 borrowed, according to the Bureau of Consumer Financial Protection. For a two week loan, this is actually an APR of 391%.
If the loan is not repaid in full on the first payday, fees are added and the cycle repeats. Within months, borrowers may end up owing more interest than the original loan amount. According to the Pew Charitable Trusts, borrowers pay an average of $ 520 in fees to borrow $ 375.
That’s why payday loans are risky: it’s easy to get trapped in a cycle of debt and it’s expensive to get out of it.
How much can I borrow with a personal loan?
The amount you can borrow will vary depending on your state’s laws and your finances. Most states that allow the limit on payday loans are between $ 300 and $ 1,000. Check your condition payday loan statuses.
This does not mean that you will be approved for the highest amount allowed by law. A payday lender can take your income into account when deciding how much you can borrow. However, other payday lenders may not assess your repayment capacity or your other obligations, putting you at risk of financial overdue.
Can Payday Loan Repayments Build Credit?
Paying off a payday loan usually does not create credit. Most payday lenders do not report payments on time to the credit bureaus, so the loan may not help your credit score.
However, if you do not repay the loan, your credit can be damaged. The payday lender may report the default to the credit bureaus or sell the debt to a collection agency who will, which will hurt your score.
What do i need to get a personal loan?
To qualify for a payday loan, you usually need an active bank account, identification, and proof of income such as a paycheck stub. You must be at least 18 years old. Some lenders also require a social security number.
You can still be turned down for a payday loan despite having income and a bank account. Lenders who charge APRs above 36% are not legally allowed to lend to active-duty military members, their spouses and dependents, for example.
What if i can’t pay off a payday loan?
Depending on the lender and the state you live in, you may be charged late fees or insufficient funds charges. You may have a rollover option to extend the due date, but this usually comes with a fee. Unsuccessful attempts to obtain payment can also result in bank charges against you.
If a lender is unable to collect the funds, your loan may be sent to a collection agency.
Payday loan alternatives to consider
Use an interest free cash advance app. Mobile applications like To win, Dave, and Chime can offer interest-free advances on your paycheck up to two days in advance, although there are eligibility requirements and caps on the amount you can borrow.
Get a personal loan from a credit union or online lender. A personal loan will likely have a lower APR than a payday loan, so it is more affordable. Credit unions tend to offer the lowest rates for bad credit applicants, but you will need to be a member. Online lenders also serve borrowers on credit and can fund next business day loans, but rates can be higher.
Borrow money from a family member or friend. A loved one may be able to locate the funds for you. This will save you money on interest and you won’t have to undergo a credit check. Just make sure you agree to the terms of the loan, such as when you pay it back.
Contact a community organization. There are local and regional organizations that provide free funds to cover essential expenses. To verify NerdWallet’s Local Alternatives Database to payday loans to see what is available in your state.
Once your immediate financial emergency has passed, start creating a emergency fund. If you can save even a few hundred dollars over time, you are paying yourself back rather than the lender in an emergency.
Payday Loan Alternatives to Avoid
Long term loans with high interest rates: These loans extend repayment terms up to five years. You don’t need good credit – some might sound like installment loans without credit check – but you usually have to meet the requirements for a payday loan. Interest costs go up quickly: a loan of $ 3,200 over two years at 87% APR will end up costing $ 6,844.
Auto title loans: These short term loans, when legal, require you to hand over the title to your vehicle as collateral for the debt. They’re often compared to payday loans, but they can be even worse – if you don’t pay back, the lender can foreclose your car.