If you are considering a payday loan, then it is crucial that you fully understand what it means to take one out. Payday loans otherwise called cash advances or check loans are a kind of short-term loan that is usually for less than $500 with repayment due on the next payday. We’ve put together the ultimate guide to payday loans so that you can make an informed decision as to whether or not to take out a payday loan. Below is everything you need to know about these types of loans.
Overview of Payday Loans
Payday loans typically have three noteworthy features. The loans are for smaller amounts as previously stated and are taken out of your next paycheck. Additionally, most payday loans require that you allow lenders to access your bank account or that you write a check for the entire amount beforehand so that your lender can withdraw the amount from your account in the case that you do not repay it on time. Other features of payday loans vary. For instance, many payday loans are designed to be paid off in a lump-sum payment with interest-only payments called “rollovers” or “renewals”. In other cases, payday loans can be structured so that they are paid in installments over a length of time.
How Payday Loans Are Paid Out
There are several ways that a lender may disburse loan funds to you, including by check or cash, electronically depositing funds, putting it on a prepaid debit card or directly into your checking account. The finance charge associated with this type of loan can be anywhere from $10 to $30 for each $100 that you borrow. For example, a two-week payday loan with a $15 per $100 fee has an APR of 400 percent. In comparison, a typical credit card has an APR of between 12 and 30 percent. The fee you will be charged depends on the state you live in and other such factors. There are even some states in which payday loans are prohibited.
Payday Loans from Banks
You may also receive a payday loan from a bank as they offer this type of loan as a way to make money on the fees that accumulate since banks charge similar fees to payday loan stores. Often, people choose to take out payday loans from banks because of an emergency. Although banks may not call their product a “payday loan,” it generally comes with the same features.
How to Take Out a Payday Loan from a Bank
You may apply for a payday loan by simply asking your bank. If you can make an agreement with the bank, then your savings or checking account will be credited for the amount. On the agreed upon due date, the bank will simply debit the same amount along with their fee right from your account. If you do not have the funds to repay the bank when it is due, then the bank likely will take the amount from its overdraft facility, which will cause higher interest to start accumulating on it.
Payday Loans for Financial Difficulties
Customers often choose to take out a payday loan during a financial difficulty. Often, it is those who do not have a substantial income who are most attracted to this kind of loan when they only require a small sum to pay their expenses. Customers with low credit scores are also lured to this type of loan, as it does not require a credit check to obtain. This makes payday loans ideal for those who have run out of other options due to their poor credit. Lastly, emergency situations in which customers do not have the money to cover it can gain access to these funds through a payday loan, especially as payday loans are often dispersed within 24 hours.
Qualifying for Payday Loans
When going through a payday lender, you can often get your hands on a loan simply by filing out an online application. One of the best parts of payday loans is that they do not require you to fill out mountains of paperwork like other loans, and as stated earlier, they will not check your credit history. To qualify for a payday loan, you must have an Individual Taxpayer Identification Number or Social Security Number, as well as a bank account and a steady income source. Most lenders do not require you to give your reason for obtaining the loan either. If you apply online, you’ll receive an almost instant decision, and if approved the funds will be deposited to your checking account overnight.
Cash Advances vs Payday Loans
The term “cash advance” is often used instead of “payday loan” to reference an advance loan on your paycheck. Cash advances are structured the same way that payday loans are, in which the most that you can take out varies largely on your paycheck. Additionally, cash advances are meant to be paid off by your next payday. In some instance, “cash advance” is the term used for lines of credit or credit cards. This type of advance is based on the credit limit of your credit card.
What Happens If You Are Unable to Repay?
Payday lenders will typically try to take money from your account or cash the check early morning the day that the loan is due. If you do not have sufficient funds in your account, then they will continue to attempt to recover their payment for as long as it takes to receive the entire amount. If you are having troubles repaying your loan, then it is crucial that you immediately talk to your lender and ask that they create a repayment plan for you. Keep in mind that if you have had a friend or family member repay your loan in the past, then lenders will not hesitate to attempt to settle your debt with them.
Interest and Charges on Past Due Loans
In most cases payday lenders will immediately charge a late payment fee between $15 and $30 if they are unable to collect the funds on the day that it is due, additionally for each day that it is not repaid, the loan will accumulate interest. Before obtaining a payday loan, it is imperative that you read up on a lenders late payment charges so that you know what to be prepared for, even if you believe you’d be able to repay your loan on time. Failing to repay your payday loan will also result in damaging your credit further.
Getting Help If You Are Unable to Repay
Once you know that you will not be able to repay your payday loan fully, it is recommended that you get into contact with an independent debt charity to ask them for advice. There are plenty of charities out there that offer free advice on what your rights are and how you should handle late payments to a payday lender. Many will also help you with recommendations for getting your finances on track so that you do not have to bank on credit.
When Your Loan Gets Sent to Debt Collection
If you have not repaid your payday loan or have come up with a repayment plan after a certain amount of time (usually two months), then the lender will give your case to a debt collection agency. When this happens, it can be extremely stressful as you will begin to receive phone calls and letters from collectors demanding repayment. If you have come to this stage, then you should take the time to work out the amount you can afford to repay and how often. Talk to your debt collector and work out a plan. Once you pay the collector, they will then pass this money to the payday lender.
Alternative: Ask Your Employers for an Advance
Due to the high-interest rates and fees, if it is at all possible to find an alternative to a payday loan, then it can be financially beneficial. For example, you may consider asking your employer for an advance. This can be quite useful if you need the advance for a financial emergency. Simply talk to your boss about an advance on your paycheck. The benefit of this is that it is not a loan, as it is your money, you are just receiving it sooner than you would otherwise. This is a much cheaper option than taking out a payday loan, as your employer likely will not charge you interest on the loan.
Alternative: Take Out a Credit Union Loan
If you are part of a credit union, then ask its member services department if they are willing to lend you a cash advance. Many credit unions are willing to hand out a short-term, small emergency loan to aid their members in financial distress. Obtaining a loan from your credit union is likely a better option than a payday loan as these loans have much lower interest and so are more affordable than those from payday lenders or even traditional banks. They are also more flexible with their approval process than traditional banks.
Alternative: Ask a Friend or Relative
This option should be considered carefully before proceeding, and in some cases, a payday loan is, in fact, better than borrowing from a family member or friend. However, if you do have a relative or friend that will lend you money, then it is an option worth considering. If you do so, it is imperative that you pay them back as quickly as possible so that you maintain your relationship with them.