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Payday Loans Introduction

Many Americans are grappled with unexpected bills and expenses. When faced with this situation, they opt to borrow money from lenders who offer cash advance loans. These loans are commonly called payday loans. When a real emergency hits and cash is desperately needed immediately, many trusted lenders offer quick cash loans to people who need it the most.

What is a Payday Loan?

A payday loan is a short-term unsecured loan. Borrowers opt to take out payday loans as a quick fix for unprecedented expenses. It is offered to low-income households, usually to those who are unable to provide sufficient collateral to get low-interest loans. These borrowers come from communities where a majority of the population find it challenging to meet their monthly financial obligations. This type of loan does not require a minimum credit score. This means that applying for a payday loan does not impact a borrower’s credit score.

Payday Loan Statistics

In the United States, about 12 million Americans avail of payday loans annually. With this statistic, Americans are paying the staggering amount of money around $9 billion in cash advance loans fees per year.

The state with the most number of cash advance lenders is California. It is followed by Texas. The state of Rhode Island has the least payday lenders, with at least 5 registered institutions. The state with the highest annual percentage rate for payday loans is Missouri. It has as much as 1,950% on a 14-day loan worth $100. Many states who allow these types of payday advance require lending institutions to lay out all the information for borrowers before granting them a loan. Important types of information to give the borrowers are interest rates and service charges.

Many states that allow payday loans have restrictions, usually focusing on the number of loans that someone can take out. Although payday loans are legal in South Dakota, they are strictly regulated. The reason behind this is to protect its citizens. In this state, borrowers can only take out $500 at a time. The annual percentage rate of a maximum of 36% is also regulated by the Mount Rushmore state. 36% is also the maximum annual rate that is allowed in Colorado.

How Payday Loans Work

Essentially, payday loans offer the borrower quick cash loans. It is easy to procure a payday loan. Borrowers only need to show employment evidence and a record of their previous payslip. To qualify for a loan, borrowers need to be at least 18 years of age and a U.S. citizen. They should also have a verifiable income, a checking account, and a valid phone number. Many lending institutions offer same-day approval, particularly those that offer loans through online portals.

For people who are in desperate need of instant cash and they have bad credit, payday loans help tide them over. Borrowers are more concerned about getting the loan and generally ignore the high-interest rates. For instance, if a borrower gets a short-term payday loan, they are expected to pay a higher amount within two to four weeks.

Paying back the loan is usually done through installment. The loan can be paid either weekly or bi-monthly. Over the course of paying back a loan, borrowers will often pay double the amount that they borrowed. On top of this, payday loans also charge a finance fee. Finance fees range from $10 to $30.

Regulations to Consider

It is important to regulate payday advance loans because lenders have had a reputation for asking for excessive charges. These loans tend to become debt-traps. Therefore, many U.S. states are protecting their citizens through sound regulations. These service provider regulations include setting cap rates on lending institutions.

In the United States, payday loans are legal in only 27 states. There are 9 other states that allow short-term lending but with specific restrictions. It is important to note that there are certain states that prohibit payday loans. These states include Massachusetts, New Jersey, Arizona, Arkansas, Maryland, Connecticut, Georgia, New York, Pennsylvania, North Carolina, Vermont, and West Virginia.

Payday Loan Lenders You can Trust

If you really need to take out a payday loan and you have no other alternatives, here are the most important characteristics of trusted payday loan lenders:

1. Quick approval

Lenders of payday loans should offer quick approval, especially if the loan is offered through an online portal. Getting a cash advance loan online has a lot of benefits versus visiting a retail location. Borrowers don’t have to travel and wait in line.

2. Widely available

It is beneficial for payday lending institutions to operate in states where it is legal to offer payday loans. Having widespread presence means that they are able to serve customers at a location that is convenient for them.

3. Convenient application procedures

The best payday loan providers offer borrowers various convenient ways to apply. They can either apply online, in person or via phone.

4. Compliant with state laws

Make sure that lenders comply with state laws. It is best to look into their compliance when it comes to regulating loan fees, rollover restrictions, and loan terms.

5. Offers lower rates for trusted borrowers

A good lending institution should offer lower interest rates to borrowers who successfully repay loans. This is important for borrowers because getting the best rate on a payday loan can be challenging. It is a great relief for repeat customers who have good track records of making reliable payments to be able to secure future loans at a lower annual percentage rate.

Payday Loans: The Bottom Line

Before procuring a payday loan, it is highly recommended that research is done on state laws and annual percentage rates. While there are payday lenders who genuinely provide financial help and assistance to those in need, there are also those that operate only to earn money, asking for exorbitant charges that can possibly leave the borrower in debt for a long time. The main message for borrowers is to only go to trusted payday lenders. They should also think twice when they see attractive payday packages, especially those that seem too good to be true.

Updated: Oct 13, 2019

If you need a quick infusion of cash for an unpaid bill or for an emergency expense, chances are, you’ve considered taking out a payday loan. Relying on payday loans for sudden cash needs is a common practice in the US, particularly for those who have poor credit records or no credit at all. It is what people use when they need cash in an instant and have nowhere else to get it.

If you are contemplating taking out one of these loans, you should first know what you are getting yourself into. Here are some important facts about this loan that you should know.

What is a Payday Loan?

A payday loan is basically a short-term loan that you repay on or before your next payday. To guarantee that you pay the money you borrowed on time, you will be asked to either issue a post-dated check or allow the lender to remove the funds from your bank account when the day for repayment arrives. This particular loan comes with high-interest rates and handling fees, which are added to your payable amount and are due on the same date as the principal amount.

The amount you can borrow with such a loan is between $100 and $1,500. The amount you can expect to pay in interest and other fees with this borrowed money can range from $10 to $30 for every hundred that you borrow. This means, if you borrow $1,500 and the fees are set at $10 for each hundred, you will need to issue a post-dated check for $1,650 due on your next payday.

The Good Thing About Payday Loans

The biggest reason why people gravitate towards these loans is that they are easy to access. Sometimes called a payday advance, a cash advance loan, a paycheck advance, or a fast cash loan, people can get access to the money they need within the day with this loan. You don’t need to go through stringent credit checks, strict application procedures, and long waits to get your hands on the cash you need. All it takes is a phone call, an online form application, or a visit to a lender in your neighborhood that offers this particular loan option.

You also don’t need much to secure such a loan. To qualify, all you need are the following:

  • A source of income

  • A government-issued ID

  • An active bank account

  • Be at least 18 years old at the time of the loan

Of you were to borrow money from the bank or some other lending institution, you will need more than just these. Payday loans also don’t require you to come up with collateral and are basically unsecured loans.

The Bad Thing About Payday Loans

The ease with which you can access money via this method is not without its drawbacks. Along with the good comes the bad. Aside from the aforementioned high interest rates and handling fees, you are expected to pay back the money you own on two to four weeks. If you are unable to pay on time and in full, more fees will be added to your overdue amount. These fees can include overdue fees, insufficient funds charge, and more.

Some people opt to rollover their payday loan to avoid these fees, without realizing that they will also be asked to pay a rollover fee for that. Not only that, but you will also have to pay interest over the initial interest that your short term loan already has. This means, the longer you repay the loan, the higher the amount you need to pay back.

The Ugly Thing About Payday Loans

Sadly, people who take out a payday advance are those who have a hard time paying off the loan. Sometimes, the person borrowing money ends up borrowing from more than one lender when they need a bigger sum, increasing the chances of loan rollovers which lead to bigger interest rates. This creates a huge problem for the borrower since it will mean paying more for the small amount they borrowed.

Some lending companies tend to prey on people who need the money badly but have little to almost no capability to pay on time. This traps the person in a debt cycle that they will find hard to get out of. To make matters worse, when an interest payment is missed on the rolled-over loan, the lending company may start to harass the borrower. Repetitive calls at home, calls at work, and even worse, they can sue you for the money you owe.

How to Avoid the Pitfalls of Payday Loans

If you really need to take out a payday loan, but don’t want to get trapped into a cycle that you will find hard to get out of, here are some things to remember before signing on that dotted line:

  • Take out this loan only when you are sure you can pay it in full and on time

  • Don’t go for a payday advance for frivolous expenses

  • Never take out more than one payday loan

  • Find a lender that has a good reputation

  • Opt for a four-week loan instead of a two-week loan to give yourself enough time to pull together the money you need to pay back what you owe

Alternatives to a Payday Loan

You should also be aware that when you need money for an emergency, payday loans are not your only option. There are other ways you can get what you need and here are some of your options:

  • Borrow from someone you know. Just make sure you pay them back on the promised date.

  • Sell items of value that you don’t need. You can also pawn stuff that you have to come up with the amount you require.

  • Approach your employer and ask them for an advance on your salary. As long as the reason for the advance is not frivolous, this tack may work.

  • Try borrowing from a federal credit union. They usually charge less than payday lenders and have longer repayment schedules.

  • Find someone to cosign with you on a personal loan with the bank. This gives you the chance to borrow bigger amounts of money at lower interest rates. It also helps build your credit score.

As you can see, the payday loan isn’t your only alternative when you are cash strapped. However, if you really need to get your hands on quick cash via a payday loan, make sure that you are responsible enough to plan how you will pay it back on time to avoid the problems that can arise from it.