What are payday loans and how do they work?
Payday loans are short-term, high-cost loans typically due on the borrower’s next payday. They are marketed as a quick way to get funds, even with a low credit score. However, the terms and conditions for obtaining these loans vary by lender and state.
While payday loans from different lenders have specific characteristics, there are common features that distinguish them from other types of loans:
- A payday loan usually has only one repayment term, with the repayment due date ranging from 14 to 90 days.
- The funds will be given to you via your checking account, prepaid debit card, or cash.
- Payday loans have a significantly high-interest rate.
- Online payday loans work by getting your personal and financial information, processing your application, and sending the money if your loan is approved. This can take a few hours to several business days.
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What to know before you borrow
Payday loans come with high-interest rates and fees which can trap you in a cycle of debt. Before you take out a payday loan be sure to understand the risks associated with these types of loans. Consider alternatives such as asking friends or family for help, using a credit card, or seeking financial services from a local charity or community group.
Bad credit score loans
These loans are specifically designed for people with low credit scores and are known as bad credit score loans. However, they come with even higher interest rates and stricter terms and conditions than traditional loans.
These loans are aimed at people who need to manage unexpected expenses, consolidate existing debt, or accommodate budgeting needs. They are also a good option for those rejected for other traditional loans.
Repaying these poor credit loans on time can help improve your credit score, which allows you to qualify for loans with lower interest rates. Late payments, however, will have the opposite effect and hurt your credit score.
What is the Difference Between an Online Payday Loan and an Installment Loan?
Payday loans and installment loans, while similar, are different products. Here are some ways you can distinguish a payday loan from an installment loan:
- Payday loans are only available up to $1,500, while installment loans can go as high as $50,000.
- Installment loans generally have a lower annual interest rate than payday loans.
- While some lenders can allow loan rollovers or longer-term and multiple repayments for a payday loan, this kind of loan is usually just repaid in full on the borrower’s next payday.
- Meanwhile, installment loans are paid over a longer period with fixed repayment terms (weekly, monthly, etc.) spanning from a few months to a few years.
- Installment loans require a higher credit score, while most payday lenders accept applicants with bad or no credit.
- Installment loans can either be secured (with collateral) or unsecured loans, while payday loans have no requirement for any collateral.
How much does an online payday loan cost?
The cost of a payday loan can vary depending on the lender and the state you reside in. Many states have put regulations in place to restrict the amount borrowers can obtain and how much lenders can charge in fees. These fees are typically charged at a flat rate, ranging from $10 to $30 for every $100 borrowed.
The Consumer Financial Protection Bureau states that a $15 fee for every $100 borrowed is common, however, borrowers may not see this fee upfront as payday loan terms are usually presented as part of the APR, which includes interest rates and additional fees. Hence, the APR of payday loans can be as high as 400%.
The overall cost of a payday loan, including interest and fees, will depend on your state of residence. Some states have laws limiting the cost of payday loans or requiring them to be repaid in installments. Pew Charitable Trusts analyzed lender data from states where payday lending is allowed to assess how well state laws protect borrowers.
In some states like Colorado and Hawaii, laws are in place to safeguard consumers. In contrast, states like Texas and Louisiana do not have the same type of laws and tend to have higher costs to borrow $500 (or the maximum allowable amount) for four months.
How quickly can you receive funds?
Payday lenders have different application and funding times. Most of them include the time it takes to receive funds on their loan terms and conditions.
In some cases, funds can be deposited into the bank account you provided as early as the next business day after your loan application was approved. Sometimes, the lender deposits the loan within a few hours after accepting the loan offer. In other cases, you can receive your funds after a few business days. You may follow up with your lender if your loan takes a few extra days to push through.
It’s also important to note some factors that may delay your loan application approval. These include submitting your application outside of business hours or when the lender wants to perform further financial background checking and verification.
Risks of Payday Loans
While payday loans can be helpful for fast cash, it’s important to understand the risks associated with these loans:
- High-interest rates. Online payday loans often come with high-interest rates, with some even being as high as 680%.
- Hidden fees. Some lenders give out payday loans without disclosing all of their fees upfront. Some only reveal the true cost of the loan right before signing the contract.
- Untrustworthy lenders. Some lenders may take advantage of a borrower by charging excessively high-interest rates, especially if these clients have lower credit scores.
- Debt cycle. Some borrowers become trapped in a debt cycle when they can’t pay their payday loans on time. This is because they might choose to pick up another high-interest loan just to pay the existing loan.
Overall, online payday loans can be risky, with interest repayments possibly amounting to the loan principal or even more.
If you do choose to apply for a payday loan, we recommend applying to one of the following legit payday lenders, you can read their reviews:
Who is a payday loan best for?
Payday loans are best for those who are facing a financial emergency and have no other options to access immediate funds. They may be suitable for individuals with low credit scores or those who traditional lenders have turned down.
It’s important to understand that payday loans have high-interest rates and fees, so they should only be considered as a last resort when all other options have been exhausted. Additionally, borrowers should carefully consider the risks and potential consequences before taking out a payday loan as it could lead them into a cycle of debt.
