What is a payday loan?
A payday loan is a small loan (maximum $500-$1,000) that does not require a credit
check. Payday loans have short terms and must be paid back quickly, usually within
a few pay periods. Payday loans are marketed as a way to help you cover your expenses
until your next paycheck. Also called “check cashing”, “payroll
advance” and “deferred deposit,” these loans offer a fast way
to access emergency money. Many payday lenders are not licensed, bonded or regulated
by important consumer laws.
How does it work?
Say your car broke down and you decide to borrow $300 for the repairs from a payday
lender. You’ll write a post-dated personal check for $340 (the amount plus
a finance fee) made payable to the lender. You enter this information online when
applying for a payday loan through the internet. The lender then advances you $300
for a set period, usually 14 days. When that period is up, you pay the lender $340
in cash, let them deposit the post-dated check or write another post-dated check
for the amount plus an additional finance fee. If you do not pay the debt in full
at the end of the term, you will be charged additional fees and finance charges.
Who uses these types of loans?
Generally, anyone with a checking account and steady income can obtain a payday
loan. However, it is most common for borrowers who don’t have access to credit
cards or savings accounts to use this type of lender. Since these loans don’t
require a credit check, people with no credit or credit problems often turn to payday
loans. Military personnel and recent immigrants also commonly use payday loans.
What are the benefits?
Payday loans can be a good tool for quickly and easily borrowing cash during an
emergency if you don’t have other financial options. For example, you might
use a payday lender for an immediate and temporary financial need such as a medical
bill, car repair or other one-time expense. Payday loans are helpful for people
who don’t have credit cards or savings available. Because the loans do not
require a credit check, they are easy for people with financial problems to obtain.
What about usury laws?
Numerous states have very specific laws that regulate the lending industry. Called
“usury laws” these regulations define permissible lending terms and
rates. Some states also have laws that regulate the amount a payday lender can lend
to consumers and how much they can charge for the loan. Other states ban payday
lending outright, such as New York. These laws vary widely. Payday lenders often
work around these regulations by partnering with banks based in other states, such
as Delaware. It is important to read the fine print on the payday loan offer and
understand your consumer rights.
Should I apply for a payday loan?
Before you consider applying for a payday loan, step back and consider your options.
Ask yourself if it really is an emergency. Payday loans can be helpful for one-time
emergency costs such as medical fees but are not a good idea for funding unnecessary
expenses. Is it possible to wait to repair your car or pay your bills until your
next paycheck? Remember, a $25 late fee on a bill is cheaper than a $40+ finance
charge for a payday loan. Think about other ways to borrow money:
Alternatives to payday loans
- Negotiate a payment plan with the creditor
- Charge the amount to your credit card
- Receive an advance from your employer
- Use your bank’s overdraft protections
- Obtain a line of credit from an FDIC approved lender
- Borrow money from your savings account
- Ask a relative to lend you the money
- Apply for a traditional small loan
- Ask your creditor for more time to pay a bill
- Use a cash advance on your credit card
If you have evaluated all of your options and decide an emergency
payday loan is right for you, be sure to understand all the costs and terms
before you apply.
- Shop around for a trusted payday lender that offers lower rates and fees.
- Borrow only as much as you know you can pay back with your next paycheck.
- When you get paid, your first priority should be to pay back the loan immediately.
What can I do to prepare for financial emergencies?
You can’t always predict an emergency, but you can be prepared. Ideally, you
should keep enough money to cover your household expenses for two months in a savings
account. If this goal is too high, aim to save at least the amount of one paycheck.
It is also a good idea to have a few credit cards available for unexpected costs.
If you don’t have a credit card, you can shop for an account
that accepts new borrowers online.
Now that you know all about payday lenders, you can decide if this kind of loan
meets your needs. Payday loans can be useful for consumers who need emergency cash
for a short period of time. These loans come with high costs and many dangers. If
you have limited options and if you understand how to use payday loans correctly,
you can make the most of these services. Still have questions about payday loans?
Send us an email at sales@advantage-payday.com.
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