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Payday loan is a short-term loan that can help you meet immediate cash needs until you get your next paycheck. But even though they may seem to be the financial lifeline, payday loans often make matters worse for their borrowers. Before applying, it’s important to know what you’ll get and what you’re expected to get in return.

What’s payday loan?

Payday loan is a high-cost, short-term loan for a small amount of money meant to be paid off with the borrower’s next paycheck. These loans only require proof of identity, income, and bank account. Payday loans are often given to people who have bad or nonexistent credit.

Financial experts warn against payday loans. Especially if there is a possibility that the borrower cannot repay the loan, and recommend alternative means of lending instead. A payday loan is a small-dollar, high-cost loan that can be available online or at a payday lender’s physical branch. These loans typically charge fees as high as three-digit annual percentage rates (APRs), and payments are usually due within two weeks—or closer to your next paycheck.

Daily loans are small, expensive loans that you pay off at the same time. It’s usually your next payday. Since they often lead to a debt cycle, therefore payday loans should be reserved for emergencies. Payday loans usually do not have credit benefits. But defaulting can have an impact on your credit score.
The laws regarding Pay-day loans vary from state to state. Determine the amount you can borrow or the amount the lender can charge in interest and fees. Some states completely ban payday loans.

Payday loans: How do work?

If your payday loan is approved, you can receive cash, a check, or a deposit into your bank account.

In return, the lender may ask you to write a check for the loan amount and financing fees. It depends on the amount of your loan. The lender will then cash the check on the payment date usually within 14 days. Instead, you can allow the lender to withdraw a total payment from your bank account.

If you cannot pay off a payday loan, you can renew it or convert it into a payday loan. Which increases your financial cost and can create a chain of debts that may be difficult to manage.

How much does a payday loan cost?

The costs of payday loans are determined by state laws. For every 100 dollars, the fees range between 10 and 30 dollars. A two-week payday loan usually costs $15 for every $100. Due to the short repayment terms, the annual interest rates on payday loans are usually 400% or more, according to the American Consumer Federation.

For example, suppose you borrow $200 for a two-week payday loan, and the lender charges a fee of $30 for every $200 borrowed. This is a simple price. But since you are required to pay off the loan within two weeks, the 15% financing fee translates to an annual interest rate of approximately 400%. The loan period is only 14 days.

In comparison, credit cards generally reach annual percentage rates of up to 30%, and personal loans are often more common..

How much can I borrow through a payday loan?

Government regulations determine the amount of money you can borrow from a payday loan, with the most common limit being $500.

In addition to the fixed maximum, Idaho, Illinois, Nevada, Washington, and Wisconsin set limits based on the borrower’s income. Other states, including Utah and Wyoming, do not have a specific limit.

Note: 29 states have specific laws allowing payday lending with few restrictions. Eighteen states and the District of Columbia do not necessarily ban payday loans, but they protect consumers by setting maximum interest rate caps of 36% or less. In some states, payday lenders have managed to circumvent consumer protections, such as interest rate caps and extended repayment periods, by structuring their loans differently.

Why do people consider payday loans as bad?

A payday loan can solve an urgent need for money in an emergency. But in most cases, they can cause more harm than good to the borrower. Here’s why it’s generally better to avoid payday loans:

It’s expensive. With an average annual interest rate of 400% or more, it can be said that one-day loans are the most expensive type of loan you can obtain. If you renew or extend your loan, you will face increased costs.
It’s hard to pay it off. Although payday loans are usually small, repayment is often due within just two weeks, giving you little time to solve your financial problems. In fact, most payday loan borrowers renew or extend their loans within 14 days, according to the Consumer Financial Protection Bureau. (CFPB).

They do not help improve your credit score. Quick loan companies may not require a credit check when applying, but they also do not report your payments to credit bureaus. If you fail to repay the loan, the lender can send it to collections, which may harm your credit.

What do you need to get a payday loan?

Payday lenders have few requirements for approval. Most of them do not conduct a credit check or even require the borrower to have the ability to repay the loan. Usually, all you need is the following:

• Identity card containing a photo
• A bank account in relatively good condition.
• Fixed salary

Do lenders check credit on payday?

Usually, you do not need to undergo a credit check when applying for a payday loan, making it seem less risky than alternative financing options.

In general, however, payday loans are among the most dangerous financial options you can take, especially when you are already facing financial difficulties.

Do payday loans affect your credit?

In general, no, payday loans do not affect credit. There is no difficult inquiry when applying, and payday lenders usually do not report timely payments to credit reporting agencies.

However, if you are unable to repay the payday loan, and the lender has given up on trying to recover the amount you owe, they may sell your debt to a collection agency. Once that happens, the agency will typically report the unpaid debt to credit bureaus, which can cause significant damage to your credit scores.

Alternatives to payday loans.

One of the reasons payday loans are so common may be a lack of knowledge or fear of alternatives. While you may not have access to all these options, it is important to look for alternatives to try to reduce your costs. Here are some things to consider.

Personal loans with bad credit.

Some personal lenders specialize in working with individuals who have poor credit. Whether you need to cover some basic expenses, pay for emergency costs, or consolidate debts, you can usually get the cash you need.

Some credit unions even offer Payday Alternative Loans (PALs) that provide more reasonable interest rates and repayment terms, although your eligibility will depend on the type of alternative loan you choose and the membership requirements of the credit union.

While a personal loan with bad credit will impose a higher interest rate than other personal loans, the rate will still be much lower than what you would get from a payday loan.

Read this How to Understand the Definition & Attributes of Term Loans.

Credit cards with bad credit.

Most credit cards designed for people with bad credit require a security deposit, which won’t help with your liquidity issues. However, some credit card issuers offer unsecured credit cards with low credit requirements.

Retail credit cards, for example, are often available to people with bad credit. Although they usually come with low credit limits, many of them can be used outside of the store.

Did you know…

Payday lenders in sixteen states require or allow the offering of extended repayment plans for borrowers who request them, or who have defaulted or are at risk of defaulting, according to a report from the Consumer Financial Protection Bureau in 2022. The rules for extensions vary from state to state. These states include: Alabama, Alaska, California, Delaware, Florida, Idaho, Indiana, Louisiana, Michigan, Mississippi, Nevada, South Carolina, Utah, Washington, Wisconsin, and Wyoming.

Are quick loans legal?
Each state establishes its own regulations for quick loans, typically by setting limits on the annual interest rate that lenders can charge on small loans, based on the loan amount and repayment duration. Many states have imposed strict restrictions on the cost of consumer loans in recent years, making payday loans illegal, but they are not illegal everywhere.

According to an analysis conducted by the Pew Charitable Trusts in 2022. Strict regulations ban payday loans from operating in the District of Columbia and 18 other states: Arizona, Arkansas, Connecticut, Georgia, Illinois, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia.

Frequently Asked Questions

Is a payday loan secured or unsecured?

Payday loans are unsecured loans, meaning you don’t need to pledge your car or any other property to qualify.

Do payday loans have fixed or variable interest rates?

Fast loan companies typically impose a fixed fee that is due upon repayment of the loan.

Is a payday loan an installment loan or a revolving loan?

Payday loans are neither installment loans nor revolving credit. These loans are repaid in one lump sum shortly after being borrowed. A loan with installments is repaid over time in smaller amounts, while money can be borrowed and repaid as needed with revolving credit accounts like credit cards.