Sometimes when a crisis hits, you just can’t afford to wait for your next paycheck, so what do you do?
A payday loan sounds like an easy option. You get the money quickly, and there are very few requirements to qualify. But payday loans are rarely a good idea.
What is a payday loan, and how does it work?
A payday loan is a high-cost loan, typically for $500 or less. Borrowers usually take out a small loan amount, but the size of the loans can vary.
Depending on your state law, payday loans are often available at storefront payday lenders or online.
Payday loans are quick and easy to qualify if a borrower has a job. They are intended to help consumers obtain quick cash to hold them over until their next paycheck. Payday loans are sometimes called cash advance loans, deferred deposit loans, post-dated check loans, or check advance loans.
Payday loans must be paid entirely back on your next payday or when you get an alternate income such as a pension or Social Security.
There are only 4 minimum requirements for a payday loan
According to the government’s Consumer Financial Protection Bureau, to qualify for a loan, most payday lenders only require that borrowers:
- Be at least 18 years old.
- Have an active checking account.
- Provide some proof of income.
- Provide valid identification.
How payday loans work
Payday loans are notorious for high interest rates and finance charges. Lenders charge a percentage or dollar amount per $100 borrowed. The amount of the fee could be from $10 to $30 for every $100 borrowed, depending on your state law and the maximum amount your state permits you to borrow. A fee of $15 per $100 is common. This equates to an annual percentage rate of 400% for a two-week loan. So, for example, if you need to borrow $300 before your next payday, it will cost you $345 to pay it back, assuming a fee of $15 per $100.
The costs add up so quickly that more than 90% of payday loan borrowers say they regret taking out their original payday loan.
Be sure to read the loan agreement carefully so you know the fees and costs before taking out a loan. Payday loans are considered to be so predatory some states — New York, for example, have outlawed them completely, and other states have tightened regulations. California has what’s known as the California Deferred Deposit Transaction Law. Under the CDDTL, a consumer can’t borrow more than $300, and a lender can’t charge a fee that is higher than 15% of the check total. This means that a borrower taking out a $300 loan will take home $255 if the lender charges the maximum 15% fee.
What happens if you can’t pay?
If you don’t pay back your payday loan, you could suffer some tough consequences, including:
Additional fees and interest: Depending on where you live and which lender you choose, you could be looking at extra fees if you can’t repay the payday loan. These fees are known as nonsufficient funds (NSF) fees and are charged when you can’t cover a transaction.
Debt collection activity: A lender will attempt to collect payment from you for about 60 days. If you can’t pay it within this period, you’ll be contacted by a third-party debt collection agency. Expect an aggressive debt collection agency to call as well as send letters regularly until they receive the money.
Ruined credit score: If you repay your payday loan on time, your credit score shouldn’t be affected. However, if you default on the loan and the debt is again passed on to a collection agency, you could see your score drop.
See you in court: Even if you defaulted on a small amount of money, a collection agency may take you to court. Depending on where you live, this may lead to liens against your property and even wage garnishment.
Tough time securing future financing: Since a payday loan default can remain on your credit report for up to seven years, you could have a tough time getting approved for other future loans.
You might get an arrest ultimatum: Although it’s illegal for a lender to threaten you with arrest or jail, they still might. Though it sounds scary, you cannot go to jail for failing to repay a payday loan. Consult your state attorney general’s office immediately if you get a threat.
What are the risks?
Payday loans also come with some risks like the high-interest rates, short repayment terms, the possibility you won’t be able to repay the loan, costly fees, the cycle of debt, and even overdraft fees if the lender keeps trying to take money out of your bank account.
Consider this statistic when considering a payday loan: The Online Lenders Alliance found that the number of installment loans with terms of three to 12 months is increasing. In general, many borrowers find themselves landing in financial trouble when they take a payday loan and can’t pay them when they first come due.
Overall, payday loans are risky, often leading the borrower into much worse financial conditions down the road, and they are banned in many states.
What you need to know about payday loans
Payday loans are dangerous. The fees add up quickly, and payday lenders count on borrowers having to take out a second loan to pay off the first. This creates a cycle of debt that can be very difficult to escape. Before taking out any payday loan, make sure you know the terms and fees.
Payday loan interest rates
Depending on state law, payday loan interest rates tend to be very high, so be prepared. For example, in California, payday lenders can loan up to $300 and charge a maximum of $45 in fees. Although this fee may not seem too high, the average annual percentage rate for payday loans is 372%. This is a much higher rate than most other loans or credit cards.
If you’re wondering if there’s a difference between payday lenders and tribal lenders, there is.
Again, payday loans are short-term, high-interest loans repaid via direct debit to your bank account on your next payday. They’re usually not reported to the credit bureaus and therefore have more relaxed qualification requirements than traditional loans.
Tribal loans are similar, but one significant difference between the two is the lender’s identity. Tribal payday loans are held by payday lenders who say they operate out of Native American reservations; however, they’re entirely online loans.
Tribal lenders claim that they fall outside the jurisdiction of state and federal laws, meaning that protections put in place to protect consumers do not apply. Without those restrictions, there’s no limit to the tactics that tribal lenders can implement.
Tribal loans tend to be even more expensive than their traditional counterparts, with annual percentage rates (APRs) well into three digits, sometimes as high as 600%.
For comparison, a standard credit card has an APR somewhere between 3% and 36%.
How do I repay my payday loan?
Repaying a payday loan is important. However, statistics suggest that 20% of borrowers default and 80% reborrow within 30 days.
These are ways you can pay the payday loan:
- A postdated check when you apply
- A check on your next payday
- Online through the lender’s website
- Direct bank account debits Another form of credit
The lender can electronically withdraw money from your account if you don’t repay the loan when it is due.
What is a rollover loan?
A rollover loan generally means paying a fee to delay paying the loan. If your loan is renewed or rolled versus being repaid in full on the due date, you’re paying a fee to extend the loan due date. Renewing by paying just the fees won’t reduce the principal amount owed.
CFPB and payday loans
In July 2020, the Consumer Financial Protection Bureau issued a rule removing a 2017 rule mandating that payday lenders assess a borrower’s ability to pay. It placed a requirement that limits repeated attempts by payday lenders to collect from borrowers’ bank accounts.
Before the July rule, the Trump Administration issued proposed rules in February 2019 to revoke the mandatory underwriting provision of the 2017 rule and to delay the Aug. 19, 2019, implementation of that rule. Followed by a June 6, 2019, final ruling delaying the August 2019 compliance date.
Are there any payday loans without checking account requirements?
Currently, you can still obtain a payday loan if you do not have a checking account. You will need proof of employment, a steady income source and a savings account. However, in some cases, payday loans don’t require a checking account.
While payday loans can be used by those who lack access to more traditional financing options, obtaining a checking account is a challenge for some.
Without access to a checking account, consumers will have difficulty getting approved for traditional financing options, such as conventional loans.
Payday loans, meanwhile, can be more flexible. The less restrictive nature of payday loans is why they are so popular among those in tight financial situations.
How do payday loans affect my credit?
Simply taking out a payday loan won’t necessarily ruin your credit, according to the Consumer Financial Protection Bureau.
But bear in mind, that the cycle of debt that comes with payday loans might result in you defaulting on other payments, which might negatively impact your credit history and score.
Is a payday loan worth the risk?
After reading all the above, you might wonder if a payday loan is worth the risk. The simple answer is only if you’re certain you can pay it off as planned.
Other options to avoid a payday loan
Cash advance apps: There are many great cash advance apps that allow you to borrow small amounts of money for very minimal fees. Dave, Varo and Earnin are some examples of better options because these apps are fast, inexpensive and have flexible repayment terms. Some can get you the money within minutes, and others will send it the next business day.
Get help with medical bills: Ask the healthcare venue if you can make payments with them directly via their finance department.
Borrow from a credit union: A credit union often have lower interests rate and easier terms. Read also: Medical Debt Consolidation: Is It Worth It?
Apply for a bad credit loan: Instead of getting a payday loan, you may be able to qualify for a “bad credit” personal loan. Several lenders offer these loans ranging from $500 to $10,000. However, APRs can commonly be quite high, and you may get an origination fee or other charges too. Unlike home and auto loans, these loans don’t require you to put up property as collateral. They typically require a credit check.
Try other ways to make money. You might have to get a second or third job to make ends meet.
Form a lending circle: As a member of a lending circle, you can borrow money from other people at no cost to pay off high-interest loans, cover emergency expenses, buy a car, and so forth. A lending circle includes six to 12 people. Loan amounts range from a couple of hundred dollars to thousands of dollars. Mission Asset Fund operates one of the most well-known lending circles.
Peer-to-peer lending: Peer-to-peer loans are available through online platforms, such as Lending Club and Prosper, that match potential borrowers with investors willing to issue loans. At Prosper, APRs range from 7.95% to 35.99%. Lending Club advertises APRs from 7.04% to 35.89%. Keep in mind that peer-to-peer loans typically come with fees based on the percentage of the amount you’ve borrowed.
Borrow from a friend or family member: Ask mom, dad, spouse, aunt, uncle, or whoever might be able to spot you a loan so you can cover your bills, etc.
Credit card cash advance: Check with one of your major credit cards to see if a loan would be less costly than taking out a payday loan.
Consult a credit counselor: Contact a local consumer credit counseling service to help develop a monthly budget o debt repayment plan with creditors.
Try to negotiate with your creditor: See if they can offer you a payment plan. Apply for a low-interest credit card (will only work if you have a couple of weeks of flex until the card arrives.
Get a side hustle: Do a side gig like selling unused or retired clothing online, part-time freelance work, web design, writing or graphic design, think about driving for a ride-hailing service like Uber or Lyft, or sell craft items that you make, such as quilts or jewelry.
The most common reasons you would get denied for a payday loan (or any loan) are your credit score, income and past borrowing history. It could also be somewhat difficult if you don’t have a social security number. While many payday lenders do cater to borrowers with less-than-average credit scores, some won’t lend to you if they know you can’t repay the loan.
Because of recent changes in federal law and some states that restrict payday loan fees for military service members and their dependents, some payday lenders may opt not to make loans to service members and their dependents.
Also, lenders are subject to the Military Lending Act (MLA) — a law intended to prevent lenders from gouging military personnel with exorbitant interest rates and fees that come with payday loans, tax refund anticipation loans, and car title loans.
Active-duty military members and military spouses are protected under this act which requires:
A 36% cap on interest rates. This cap is on interest rates on loans with terms under three months. While still high, a 36% interest rate is far more reasonable than the three-digit APRs that can come with some short-term loans.
No mandatory waivers of consumer protection laws. A lender can’t require you to submit to mandatory arbitration or ask you to give up your rights under state or federal laws, as they can with the public.
No mandatory allotments. A lender can’t make you agree to a voluntary military allotment — or automatic repayments from your paycheck — for loan approval.
No prepayment penalty. A lender can’t charge you a fee or other penalty if you find yourself able to pay back your loan before the end of your terms.
If you want to know whether a payday lender is licensed to do business in your state, verify the information with your state regulator or attorney general.
Not all states allow payday lending, and some states allow payday lending as well as require lenders to be licensed. In some states, if a payday loan is made by a business that is not licensed in that state, the payday loan may be void.
If this happens, the lender may not have the right to collect or require the consumer to repay the payday loan.
The primary difference between the two loans is the loan amounts. While payday loans are small sums of money ranging from $100 to $500, installment loans allow for higher loan amounts ranging from $500 to several thousand dollars.