What Are Payday Loans? Everything You Need To Know

What are payday loans and money
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Asking “what are payday loans” and wondering if it’s what you need? 

Payday loans, often referred to as cash advance loans or check advance loans, are short-term, high-interest loans typically designed for individuals who require quick cash before their next paycheck arrives. 

We take a deeper look at payday loans so you can make an informed decision about whether it’s right for you.

What Are Payday Loans and Who Is a Payday Loan Right For?

Payday loans typically target individuals with poor or no credit and urgently require cash. 

A payday loan could be a viable option for those who need a small sum of money quickly and are confident they can pay it back within a few weeks. 

The loans are particularly beneficial for covering unexpected expenses or financial emergencies such as car repairs, medical bills, or necessary household expenses.

However, due to their high cost and the risk of falling into a cycle of debt, payday loans should only be considered as a last resort after exhausting all other available resources.

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What Are Payday Loans and How Do They Work?

Understanding the operational mechanics of payday loans is crucial for anyone considering this form of borrowing.

Credit Checks

Unlike most other forms of credit, payday loans usually don’t necessitate a thorough credit check. Lenders primarily focus on an applicant’s income and require proof of it. This makes payday loans accessible even to individuals with poor or no credit history.

Repayment

Repayment terms for payday loans are typically very short, often aligning with the borrower’s next payday, hence the name. 

This could be anywhere from two weeks to a month from the date of loan issuance. To repay the loan, the borrower generally writes a post-dated check for the total balance, including fees. 

Alternatively, they allow the lender to electronically debit the funds from their bank, credit union, or prepaid card account.

Fees and Other Costs

Payday loans are notorious for their high interest rates and additional fees. 

In fact, the cost of a payday loan can range from $10 to $30 for every $100 borrowed, leading to an annual percentage rate (APR) of nearly 400 percent. 

This cost can rapidly increase if the loan is rolled over, which is when a borrower cannot pay back the loan by its due date and extends the loan term, often incurring additional fees.

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Benefits of Payday Loans

Despite their high costs, payday loans do offer several advantages:

  • Quick access to cash: Payday loans can provide immediate relief if you need money urgently. The application process is straightforward and fast, with funds often dispersed within 24 hours.
  • Few requirements: Payday loans have fewer requirements compared to other loans. You usually just need a government-issued ID, a bank account, proof of income, and to be over 18 years old.
  • Unsecured loan: Payday loans are unsecured, meaning you don’t have to provide any collateral to get the loan.

Risks of Payday Loans

Despite their benefits, payday loans also come with significant risks.

Steep Borrowing Costs

One of the most significant risks of payday loans is their high cost. The combination of high interest rates and fees can make payday loans much more expensive than other types of credit.

Risk of Default

The short repayment terms and high costs associated with payday loans can make them difficult to repay, increasing the risk of default. If a borrower can’t repay the loan on time, they may be forced to roll over the loan into a new loan with additional fees.

Excessive Rollover Fees

If a borrower can’t repay a payday loan when it’s due, the lender might offer to “roll over” the loan into a new loan. This process incurs additional fees and can lead to a cycle of debt that can be difficult to escape.

Payday Loan Costs

The cost of payday loans can vary greatly depending on the lender and the borrower’s state of residence. Many states have laws limiting the fees or interest rates paid lenders can charge. 

However, borrowers should know that payday loans often have high fees and interest rates. For instance, a typical two-week payday loan with a $15 fee per $100 borrowed results in an APR of almost 400%.

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How Payday Loans Can Affect Your Credit

Although payday loans don’t typically require a credit check, they can still affect your credit if you fail to repay. If the lender sells your debt to a collection agency or sues you for the unpaid balance, it could negatively impact your credit score. 

However, if you repay your payday loan on time, it won’t improve your credit score, as most payday lenders don’t report payments to the credit bureaus.

Are Payday Loans Legal?

The legality of payday loans varies by state. Some states, including Arizona and North Carolina, have banned payday loans altogether, while others restrict the amount that consumers can borrow or the fees and interest lenders can charge.

Regulations and Laws Surrounding Payday Loans

Payday loans are regulated at both the federal and state level. At the federal level, the Consumer Financial Protection Bureau (CFPB) has issued regulations to prevent payday lenders from offering loans to customers who cannot afford to repay them. 

State laws vary widely and can include restrictions on the maximum loan amount, the maximum finance charge and interest rate, the number of rollovers allowed, and more.

Payday Loans and the Military Lending Act

The Military Lending Act offers special protections for active-duty service members and their dependents. The law caps the APR on various types of credit, including payday loans, at 36 percent and includes other protections against predatory lending practices.

How to Responsibly Use Payday Loans

While payday loans can provide a quick solution for immediate cash needs, they should only be used as a last resort. If you choose to take out a payday loan, make sure to borrow as much as you can afford to repay by your next paycheck. Avoid rolling over the loan if at all possible.

Tips for Choosing a Payday Loan Lender

If you decide to use a payday loan, it’s important to choose a reputable lender. Here are a few tips:

  • Check the lender’s license: Before you apply, check that the lender is licensed to provide payday loans in your state.
  • Compare fees and rates: Not all payday loans cost the same. Be sure to compare fees and interest rates before you take out a loan.
  • Read the terms and conditions: Be sure you understand the loan’s terms and conditions before you sign. Look for any hidden fees or penalties for late or missed payments.
  • Check reviews and ratings: Look at reviews and ratings for the lender to see what other customers have said about their experiences.

Top Payday Loan Lenders to Consider

If you’re searching for online instant loans, consider the following lenders:

  • MoneyMutual: This lender offers payday loans up to $2,500. They offer a quick online application process and quick funding.
  • Viva Payday Loans: Viva offers payday loans from $100 to $5,000. They offer a fast and secure online application process.
  • BadCreditLoans: As the name suggests, this lender specializes in loans for those with bad credit. They offer payday loans up to $1,000.
  • 247FastFunds: This lender offers payday loans up to $2,500. Their online application is quick and easy to complete.
  • CashUSA: CashUSA offers payday loans up to $10,000. They offer a simple online application and quick funding.

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What Are Alternatives to Payday Loans?

Before resorting to payday loans, consider these alternatives:

  • Personal Loans: Personal loans typically come with lower interest rates and longer repayment periods than payday loans. They can be a good option for larger expenses or consolidating high-interest debt.
  • Credit Cards: If you have a credit card, you might be able to use it to cover the expense. Even though interest rates can be high, they are usually still lower than those for payday loans.
  • Payday Alternative Loans (PALs): Some credit unions offer PALs, short-term loans designed to prevent customers from using high-cost payday loans.
  • Negotiate with Creditors: If you’re having trouble paying your bills, try negotiating with your creditors. Many are willing to work with you to set up a payment plan or reduce your payment.

FAQs: What Are Payday Loans?

Still have questions about payday loans? Here are answers to some of the frequently asked questions about payday loans.

What Is a Payday Loan Example?

An example of a payday loan is taking a $500 loan with a two-week term. If the lender charges a $50 fee, you must pay back $550 in two weeks.

How Long Do Payday Loans Stay in the System?

The records of traditional loans may be kept for six to 10 years by credit bureaus. However, payday lenders don’t usually report to the credit bureaus unless your payday loan is sent to a collection agency.

Can You Get a Payday Loan Without a Bank Account?

Yes, some lenders may allow you to take out a payday loan with just a prepaid debit card account. However, this option might come with additional fees.

Is a Payday Loan Secured or Unsecured?

Payday loans are unsecured, meaning you don’t have to provide collateral like your house or car to get the loan.

Are Payday Loans Fixed or Variable?

Payday loans usually have a fixed interest rate, which means the APR remains the same throughout the life of the loan.

Can Payday Loan Debt Be Forgiven?

In practice, it’s very rare for payday loan debt to be written off. Lenders typically make significant sums from the interest and fees they charge on payday loans.

Are Payday Loans Hard to Pay?

Payday loans can be challenging to pay back due to their high interest rates and short repayment terms. This can lead to a cycle of debt if borrowers are unable to repay the loan on time and must roll over or renew the loan with additional fees.

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What Are Payday Loans? Conclusion

While payday loans can provide quick, short-term financial relief, there is a risk of borrowers getting trapped in a cycle of debt due to the high interest rates and fees.

Before resorting to a payday loan, consider alternatives like personal loans, credit cards, or payday alternative loans from credit unions. 

If a payday loan is your only option, ensure you understand the terms and costs and plan to repay it as quickly as possible to avoid additional fees and interest.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.