Payday loans are small-dollar, short-term loans used to cover unexpected needs. They frequently have large costs and must be reimbursed within a few weeks, making them impossible to repay on time. As a result, the majority of payday loan borrowers will refinance their debt, incurring additional fees.
You should avoid taking out payday loans as a general rule. Here’s a closer look at how payday loans work, as well as several safer alternatives to consider. Visit Oak Park Financial home page for more options.
What is the definition of a payday loan?
Payday loans are tiny, short-term loans that are often payable on your next payday. The following are common characteristics of payday loans:
Access to your bank account funds keeps you safe: Most payday lenders demand you to send a post-dated check or authorize them to debit your account, giving them immediate access to your bank account.
Repaid over a short period of time: A payday loan might last anywhere from a week to 120 days, depending on the state. Many lenders, on the other hand, make the loan due on the borrower’s next payday.
Loan amounts are restricted: Payday loans often vary from $50 to $1,000, depending on the lender and the restrictions in your jurisdiction (the loan ceiling in Oregon, for example, is $50,000).
Repayment in one lump sum: Unlike installment loans, which are often repaid over several months, payday loans are typically repaid in full, in one payment, and on a specific due date.
Borrowers are charged a finance fee: A finance fee is charged on payday loans, and it is normally repaid along with the rest of the payment.
Potential to rollover an outstanding balance: Many payday lending companies allow consumers to “rollover” or renew their loans by paying a fee to extend the repayment time. However, over time, this could lead a loan’s finance charges to balloon to untenable proportions. It might lead to a debt cycle in which you borrow more money to pay off your debts.
They usually don’t require a credit check, making them available to people with terrible credit. Payments, on the other hand, will not appear on your credit report, thus they will not help you develop credit.
What is the cost of a payday loan?
Payday loan rates differ depending on the state and lender. The fee is normally a flat rate ranging from $10 to $30 every $100 borrowed, while the Consumer Financial Protection Bureau reports that lenders frequently charge a $15 fee for $100 borrowed.
You’re unlikely to see this cost up front. Payday loan terms are usually expressed as an annual percentage rate (APR), which includes both the interest rate and any additional expenses. Payday loans contain excessive APRs, owing to the fact that most loans are rolled over.
The Pew Charitable Trusts discovered in 2016 that borrowers took an average of five months to repay a two-week $375 loan with a $55 finance fee. The finance fee was $520 when the loan was finally paid off, significantly more than the amount borrowed.
Is it a good idea to take out a payday loan?
Payday loans and their exorbitant APRs should be avoided in general. Because many payday lenders require access to your bank account, they make payment withdrawals even if doing so will result in an overdraft. Furthermore, excessive fees and limited repayment terms can keep you stuck in a debt cycle.
On the other hand, if you have bad or no credit, can repay the loan on time, and need money immediately, you might choose a payday loan. Even so, there are more secure and affordable bad credit loan choices accessible, with some lenders offering quick funding.
What is the procedure for obtaining a payday loan?
Check your state’s payday loan laws: Payday loans are illegal in several states, and those who do are subject to stringent regulations. Use the National Conference of State Legislatures’ outline of payday lending statutes to determine what rights and safeguards you may have in your state.
Check to see if a lender is registered in your state: Check with your state’s attorney general or banking regulator to see if payday loans are legal in your state.
Only borrow what you’re certain you’ll be able to repay: If you’re not sure you’ll be able to repay a loan, consider other possibilities, such as asking family for a small loan.
Take a look around: Check with banks, credit unions, and internet lenders to see if they provide small-dollar loans instead of going to the nearest payday lending outlet.
Costs are compared: Compare APRs and lender costs, then do the math to figure out how much the loan will cost you in the long run if you don’t pay it back in a week or two.
Choose a payday loan provider: You may be able to apply for a loan and receive immediate loan approval online, depending on the lender you choose and your state of residence.
Read your contract carefully: Check the terms carefully once you’ve decided on a loan. Pay attention to any potential late fees or other expenses, as well as the terms of any rollovers.
Payday loans: Frequently Asked Questions
Is it possible to acquire a payday loan with bad or no credit?
Because most payday loan providers do not conduct credit checks, it is easy to qualify for a payday loan with bad or no credit. Payday loans, on the other hand, come with high interest rates, and lenders expect the money to be repaid immediately. If you don’t pay back the loan on time, your credit could suffer, and your debt could be sent to collections.
What information will a lender want to see if I don’t need a credit check?
You’ll most likely need a form of identity, a steady paycheck, and a bank account in good standing to qualify for a loan.
Is it possible to receive a payday loan online?
Yes, you can usually receive a loan online or in person at a payday lending establishment.
What is the best way to get out of a payday loan debt?
If you’re having trouble paying off payday loans, you might want to look into a debt consolidation loan. This is a sort of personal loan that allows consumers to combine various types of debt into a single new loan with a lower interest rate and a set monthly payment. You’ll need good credit to get the best interest rate on a debt consolidation loan. Expect to spend more if you have fair credit, though rates are still cheaper than payday loans, and payback arrangements can help you avoid hefty monthly expenses.
There are some alternatives to a payday loan.
Make a cash payment.
The cheapest and quickest way to pay for unexpected expenses is still cash. Consider utilizing money you’ve already set aside for unforeseen expenses before applying for a loan. You can avoid the interest and fees associated with an emergency loan this way.
Consider selling items you no longer use, starting a side business, or using your emergency fund as a safe haven for any bonuses or tax refunds you receive.
Alternative to payday loans (PAL)
Check to check if your credit union is federally insured and offers a payday alternative loan (PAL). There are two types: PAL I and PAL II, both of which are unsecured, low-cost loans. PALs have 12-month payback terms and a maximum APR of 28 percent, which is significantly lower than payday loans.
Because not all federal credit unions offer PALs, they can be difficult to come by. New credit union members would have to wait a month before they could borrow money with PAL I loans. PAL II loans, on the other hand, are exempt from this condition and come with a higher borrowing limit and a longer repayment period. Both sorts of loans may involve a credit check, depending on the credit union.
Cash advance with a credit card
You might be able to acquire a cash advance if you have a credit card. The procedure for obtaining a cash advance is simple: simply withdraw money from a bank or ATM using your card. However, doing so can be costly – cash advance APRs are substantially higher than purchase APRs, and your cash advance is likely to come with a fee. Cash advances, unlike purchases made using a credit card, start accruing interest immediately away.
Alternatively, you might use your credit card to make emergency purchases. According to statistics from October 2020, the average credit card APR among open accounts that incur interest is 16.43 percent. Using your credit card instead of a payday loan could save you a lot of money.
Loan from a 401(k) plan
A 401(k) loan allows you to take money out of your retirement account. Because you’re really borrowing money from yourself with this form of loan, it’s worth considering if you have low credit and wouldn’t be able to get funds otherwise.
In comparison to payday loans, 401(k) loans have more flexible periods and cheaper interest rates. The interest rate is prime + 1%, and you can borrow up to $50,000, or half of your vested account balance (whichever is less). The loan can be paid back over a period of up to five years.
There are, however, some significant disadvantages. To begin with, your loan service provider may not authorize this form of loan, and you will be responsible for paying taxes on the amount you repay. You might also have to pay application and maintenance costs, and you’ll lose out on revenues that could have helped you save for retirement. Finally, if you lose or quit your work, you’ll only have 90 days to repay what you owe in order to avoid paying income tax on the amount borrowed.