When you experience unforeseen events that represent a challenge to recover from them economically, it is when you need a long-term loan the most, or simply if you want to undertake a remodeling, or the ideal financing to acquire high-caliber assets, and your income does not allow. In some cases, however, you might need an instant payday loan.
What is a Payday Loan?
While payday loans do not have any set definition, they are usually short-term loans with high-interest rates, generally for $500 or less, typically due on the following payday. In addition, payday loans are unsecured personal loans bearing high interest rates and no collateral. Payday loans can be obtained online or from storefront payday lenders, depending on your state’s laws.
A payday loan typically has the following features:
- Most states limit the size of payday loans, and the loans are for small amounts. Although there are no hard and fast rules, loans of up to $500 are typical.
- The payday loan is typically repaid in a single payment on the borrower’s next payday or when the borrower receives income from another source, such as a pension or Social Security check.
- Typically, the loan is due within two to four weeks after it is made. The due date of the loan is specified in the contract.
- Repaying the loan is generally accomplished by writing a post-dated check for the full balance, including fees, or by providing the lender with authorization to debit the funds from your bank electronically, credit union, or prepaid card account.
- If you fail to pay back the loan by the due date, the lender can cash the check or electronically withdraw money from your account.
- Payday lenders generally don’t consider your ability to repay the loan while meeting your other financial obligations.
- The loan proceeds can be paid to you in cash or by check, electronically deposited into your account, or loaded onto a prepaid debit card.
- The repayment of payday loans, for instance, is usually structured as a single lump-sum payment. However, many states permit lenders to “rollover” or “renew” a loan when it becomes due so that the consumer pays only the fees due and the lender extends the loan’s due date. Payday loans, in some cases, are repaid in installments over a longer period of time.
The cost of payday loans
Payday loans typically range from $100 to $1,000, depending on the state. The loan term is usually two to four weeks—fees average $15 to $30 for a $100 loan. Payday lenders charge incredibly high-interest rates, from 400% to 800% APR and up to 18 times the rate of the best credit cards. Such loans are risky and expensive. In some cases, payday lenders employ predatory collection practices to collect a debt. In states where the maximum cost of payday loans is not capped, these rates are higher.
Payday loans: How do they work?
Payday loans are short-term cash advances using the borrower’s check held for future deposit or electronic access to the borrower’s bank account. The borrower writes a check for the amount borrowed plus the finance charge and receives cash in return. Some borrowers sign over electronic access to their bank accounts to receive and repay payday loans.
Payday loans: What you need to know
- Compare prices so that you get the best deal. Payday lenders must post their offers on at least one price comparison website so you can compare them with others. The Financial Conduct Authority must regulate price comparison sites.
- You can check if a price comparison website is regulated in the Financial Services Register.
- When checking, use the company’s name rather than the website name – it can usually be found on the homepage.
- Before lending you any money, a lender should verify that you will be able to repay it. Consequently, the lender should ensure that you have enough income coming in each month to repay the loan.
- A lender should also explain the most important aspects of the loan, such as how much you will have to pay back, what happens if you cannot repay the loan on time and that the loan is not suitable for long-term borrowing.
- Additionally, the lender should explain how continuous payment authorities (CPAs) work and how to cancel one.
Repaying a payday loan
- A payday loan requires you to repay the loan with interest within one month, or the day your salary is credited to your account.
- Most people who use payday loans pay back the money with their debit cards or via CPA.
- If you agree to CPA and there’s not enough money in your account to repay the loan on the agreed date, the lender might keep asking your bank for all or part of the money. In addition, you will be charged a late fee. So make sure you have enough money in your bank account before the repayment date.
- The lender can charge you a default fee of generally $15 if you default on the loan.
Stopping the payment
Your bank or card provider may be able to stop the CPA’s payments if you cannot afford to pay back the loan. It would be helpful if you did this at least one day before the payment was due.
The process of extending a payday loan
Your lender may offer you a little more time to repay your loan if you’re struggling to pay it off. A special loan program may be available from some lenders to extend the repayment period without charging additional interest. However, most lenders offer loan rollovers. The rollover is a new agreement for the repayment of the original loan. Taking out a loan rollover may extend the term of your payments, but you will have to repay more money to the lender as you will be charged extra interest, fees, or other charges.
Your lender will work out a new repayment plan with you when you take out a loan rollover. In that repayment plan, the lender will explain how much you will repay each month, how long it will take you to repay the loan, and how much interest you will pay.
Payday Lending: Legal Status
Under the Obama administration, regulations to regulate payday lenders were proposed in 2016 and implemented in 2017.
Furthermore, the rules required lenders to notify borrowers in writing before collecting from their bank accounts and required that lenders could not proceed without their permission after two unsuccessful attempts to debit an account. Moreover, payday loans have an interest rate cap of 0.8% per day, and no borrower should have to pay back more than twice what they borrowed.
The loans may be considered predatory lending since they carry high interest rates, don’t consider a borrower’s ability to repay, and have hidden provisions that charge borrowers added fees. They can create a debt trap for consumers as a result. So if you’re considering a payday loan, you may want to look at safer alternatives first.