A payday loan is a short term high cost loan that gives you quick access to cash for a small amount. These loans are due on your next payday hence the name. Payday loans are used by people who need immediate financial help to cover unexpected expenses or emergencies.
Payday loans have high interest rates and fees so they are an expensive form of credit. Borrowers are required to provide proof of income such as a recent pay stub and have an active bank account to receive the loan and make repayments. The loan plus fees is due in one lump sum on your next payday but some lenders may offer installment plans or rollovers in certain situations.
While payday loans can be a quick fix for short term financial needs they can also lead to a cycle of debt if you can’t pay the loan on time and are forced to take out another loan or roll over the existing loan. So it’s important to explore other financial options such as personal loans, credit cards or borrowing from friends and family before considering a payday loan.
Key Features
- Payday loans are for smaller amounts, many states have limits on the loan amount. A common loan limit is $500 but can vary above and below that.
- Generally a payday loan is paid back in one lump sum on your next payday or when another income source is received such as a pension or Social Security payment. The due date is usually 2-4 weeks from the date the loan was issued as per the payday loan agreement.
- To pay the loan you issue a post dated check for the entire balance including fees or grant the lender permission to electronically debit the amount from your bank, credit union or prepaid card account. If the loan is not paid on or before the due date the lender can cash the check or electronically withdraw funds from your account.
- Payday lenders do not consider your ability to pay the loan while also paying other financial commitments.
- The loan amount can be disbursed in various ways such as cash, check, electronic deposit into your account or by loading it onto a prepaid debit card.
- Other payday loan features can vary. For instance these loans are designed to be paid back in one lump sum. Some states allow lenders to “rollover” or “renew” loans when they become due so you can pay only the fees and extend the due date. In some cases payday loans can be structured to be paid back in installments over a longer period.
Pros and Cons
Pros
- Payday loans have very minimal requirements that are easy to meet. Anyone 18 and above with a valid ID and a source of income can be eligible.
- It takes time and patience to apply for a traditional loan. Payday loans can be obtained in 1 working day. Most online platforms and even some stores are 24/7.
- Payday loan is an unsecured loan, meaning there is no asset to collateralize. So none of your personal property is at risk of being repossessed by the payday lender. Though the lending company may have access to your bank account which can be a cause of unexpected money withdrawal.
Cons
- The average APR of payday loans is very high. In some states it can be as much as 700%. Consumer Financial Protection Bureau found that payday lenders charge 10$ to 30$ for every 100$ of the loan amount.
- Payday lenders offer to roll the loan over into a new loan if the customer can’t pay. Starting from 2 to 4 weeks of extended repayment period, the borrower can be trapped in debt cycle for years because additional fees are charged.
- If you can’t pay for a long time, your payday lender will take measures to get the money back. They can send your debt to collections which will damage your credit history and limit your future borrowing options. Or in a worst case scenario, they can take you to court and charge you for not paying the loan. You may end up with your salary garnished or even imprisoned.
- Payday loans are not reported to credit bureaus so it will not help you build credit (but can damage it instead, as we mentioned above). There’s an exception to this rule in some states: a very rare payday loan can be converted into an installment loan which can help your credit score. The terms of such conversion are not defined and it’s not clear how to do it.
How to Apply For a Payday Loan?
Online
Search for online payday loan providers using keywords like “online payday loans”, “fast payday loans” or “payday loans online same day”. Be cautious not to all lenders are trustworthy.
Check the terms and conditions, interest rates and fees of different lenders. Watch out for hidden fees or unfavorable terms.
Look for customer reviews and ratings on websites like Trustpilot or Better Business Bureau (BBB) to make sure the lender has good reputation.
Confirm that the lender is licensed and regulated in your state. This information should be available on their website or by contacting your state’s financial regulatory agency.
Prepare the required documents and information which may include your personal details (e.g. name, address, Social Security number), proof of income (e.g. pay stubs, bank statements) and bank account information.
Visit the lender’s website and fill up the online application form with the required information. Some lenders may have a mobile app or require you to create an account before applying.
If approved, review the loan agreement before signing. Make sure you understand the repayment terms, interest rates and fees.
After signing the agreement, the lender will deposit the funds into your bank account, usually on the same day or next business day.
Offline
Research local payday loan providers and compare terms, interest rates and fees.
Make sure the lender has good reputation and is licensed in your state.
Gather necessary documents including personal details, proof of income and bank account information.
Go to the payday loan store with the required documents.
Fill up the paper application form provided by the lender.
Sign the loan agreement if approved.
Get the loan amount in cash or check from the lender.
Repay the loan according to the terms to avoid additional fees or penalties.
Requirements
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You must be at least 18 years old (or the age of majority in your state) to apply for a payday loan.
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Lenders require borrowers to provide proof of steady income such as pay stub, bank statement or other document that shows regular income.
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You need to present a valid government-issued ID (e.g. driver’s license, state ID or passport) to verify your identity.
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Payday lenders require borrowers to have an active checking account in good standing. This is because the loan funds will be deposited directly into your account and the lender may require access to your account for automatic repayments.
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Lenders will ask for your phone number, email address and sometimes physical address to stay in touch throughout the loan process.
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Lenders may ask for your SSN or ITIN to verify your identity and credit history.
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Some payday lenders may perform a soft credit check to check your credit history but this is not always required as payday loans are designed for those with bad or no credit.
Ways to Get a Payday Loan
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Many payday lenders offer direct deposit into your bank account. After your loan application is approved, the lender will deposit the funds into your account within one business day. This is common for online payday loans.
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If you apply for a payday loan at a store location, you may have the option to get the loan amount in cash. Once approved and you sign the loan agreement, the lender will give you the cash on the spot.
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Some payday lenders offer the option to load the loan amount onto a prepaid debit card. You can use this card to buy things, pay bills or withdraw cash from an ATM. Some lenders may also allow you to reload the card for future loans.
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In some cases, payday lenders may issue a paper check for the loan amount. You can then cash or deposit the check at your bank or check-cashing service.
Payday Loan Rates
PDL Rates in U.S
Payday loan rates and regulations vary greatly by state and some states have banned payday loans altogether. The rates below are the maximum allowed and actual rates may be lower in some cases.
- Alabama - 456.25% APR (1.25% per day)
- Alaska - 435.50% APR (1.19% per day)
- Arizona - Payday loans are prohibited
- Arkansas - Payday loans are prohibited
- California - 460% APR (1.26% per day)
- Colorado - 214% APR (0.59% per day)
- Connecticut - Payday loans are prohibited
- Delaware - No limit on APR
- Florida - 304% APR (0.83% per day)
- Georgia - Payday loans are prohibited
- Hawaii - 459% APR (1.26% per day)
- Idaho - No limit on APR
- Illinois - 404% APR (1.11% per day)
- Indiana - 391% APR (1.07% per day)
- Iowa - 337% APR (0.92% per day)
- Kansas - 391% APR (1.07% per day)
- Kentucky - 460% APR (1.26% per day)
- Louisiana - 391% APR (1.07% per day)
- Maine - 261% APR (0.72% per day)
- Maryland - Payday loans are prohibited
- Massachusetts - Payday loans are prohibited
- Michigan - 369% APR (1.01% per day)
- Minnesota - 391% APR (1.07% per day)
- Mississippi - 521% APR (1.43% per day)
- Missouri - 445% APR (1.22% per day)
- Montana - 36% APR (per day)
- Nebraska - 404% APR (1.11% per day)
- Nevada - No limit on APR
- New Hampshire - 36% APR (0.1% per day)
- New Jersey - Payday loans are prohibited
- New Mexico - 175% APR (0.48% per day)
- New York - Payday loans are prohibited
- North Carolina - Payday loans are prohibited
- North Dakota - 487.56% APR (1.34% per day)
- Ohio - 28% APR (0.08% per day)
- Oklahoma - 391% APR (1.07% per day)
- Oregon - 153.73% APR (0.42% per day)
- Pennsylvania - Payday loans are prohibited
- Rhode Island - 260% APR (0.71% per day)
- South Carolina - 391% APR (1.07% per day)
- South Dakota - 36% APR (0.1% per day)
- Tennessee - 459% APR (1.26% per day)
- Texas - No limit on APR
- Utah - No limit on APR
- Vermont - Payday loans are prohibited
- Virginia - 36% APR + fees (0.1% per day)
- Washington - 391% APR (1.07% per day)
- West Virginia - Payday loans are prohibited
- Wisconsin - No limit on APR
- Wyoming - 261% APR (0.72% per day)
Example payday loan 300$ - 10 days APR 300%
To calculate the interest and total cost of a payday loan, you can use the following formula or PDL calculator:
Interest = Principal x (APR / 365) x Loan Duration (in days)
Let's calculate the interest for a $300 payday loan with a 10-day term and a 300% APR:
Interest = $300 x (300% / 365) x 10
First, convert the APR to a decimal by dividing it by 100:
300% ÷ 100 = 3
Now, divide the APR by 365:
3 ÷ 365 ≈ 0.008219
Next, multiply the principal by the daily interest rate and the loan duration:
$300 x 0.008219 x 10 ≈ $24.66
So, the interest for this 10-day payday loan is approximately $24.66. To calculate the total cost of the loan, add the interest to the principal:
Total Cost = Principal + Interest
Total Cost = $300 + $24.66 ≈ $324.66
In this example, you would need to repay approximately $324.66 for a $300 payday loan with a 10-day term and a 300% APR. Keep in mind that other fees, such as loan origination fees, may also apply, which would increase the total cost of the loan.
The Real Cost of a Payday Loan in the US
Payday loan alternatives have monthly interest rates which are a percentage of the initial loan amount. Payday loans are different, most payday lenders charge fixed fees of 10$ to 30$ per 100$. These fees can add up to 400% APR on average.
In Texas for example, lenders charge 20$ per 100$. If you borrow 600$ for 14 days it will cost you 120$ to borrow that amount. The annual percentage rate would be over 500%.
You will pay 120$ if you can find the money in the given time frame. But the chances are high that you will need to roll it over. A report by Pew Charitable Trusts states that it takes 5 months to pay back a 300$ loan, let alone 600$.
In reality you should consider safer loan alternatives and/or money making methods. For example, personal loans with 30% APR will cost you about 4 times less and will have at least 3 month loan term.
How to Repay a Payday Loan Debt?
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Personal check. Writing a post dated check to take out a payday loan is common. It often serves as a "collateral" for the loan and is only cashed if the borrower doesn’t pay. Sometimes the agreement with the lender can include checks as the main payment method.
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Automated Clearing House authorization. ACH authorization allows the lender to withdraw the loan and additional fees from your bank account. Other options for withdrawal are prepaid card account or credit union account.
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With cash. If your payday lender has a traditional retail store and you filled out the application in the office you might need to go to the location and pay with cash.
Legal Regulation of the Payday Loan Market in the USA
According to Consumer Federation of America, there are three types of states based on how they regulate payday lending: legal, partially legal and illegal.
Legal
There are 32 states that allow high interest payday lending: Alabama, Alaska, California, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
The legal grounds are, however, quite dubious. Some states cannot handle state law loopholes that make payday lending possible and other fail to regulate interest rates. For instance, in 2008 in Ohio a vote resulted in capping rates. But the payday business found state laws that authorize lending and simply switched to them.
Editoral Opinion
Make sure to confirm whether the lender is licensed to operate in your state. You can verify this information with your state regulator or attorney general. Check if the lender is a member of a reputable association, such as the Community Financial Services Association of America. Membership in such organizations may provide an extra level of reliability. Carefully review all the terms and conditions of your payday loan contract. Thoroughly examine the interest rates on payday loans and ensure that your contract includes a detailed breakdown of the total cost of the loan. Take advantage of your right of rescission. Usually, you can rescind the loan within three days after signing the agreement. Alternatively, there is typically a "cooling-off" period, which allows you several days to thoroughly review the contract before making an informed decision to enter into a consumer loan agreement based on the terms specified by the lender. Choosing a payday lender is a significant decision that demands careful consideration and a good understanding of how such organizations operate.Important
How to Choose a Lender
