How do Payday Loans Work?

You might have come across people advertising “quick cash” either online or in the streets. These are the payday loans offered to help you cover your “little” emergencies when working on a tight budget. But how safe are these loans? This article outlines everything you need to know about the currently popular payday loans.

What are Payday Loans?

Payday loans are short-term, high-interest loans offered on the basis of the borrower’s personal check held for future deposit. They are simply small loans you can use to cover the little emergencies of life. In order to get the loan, you need to write a check to the bank for the amount you intend to borrow plus a fee. In some instances, borrowers sign over electronic access to receive and repay these loans. Lenders often hold the checks until your next payday when the loan is to be repaid as a lump sum. You can redeem the check by either repaying the loan with cash or allowing the check to be deposited at the bank. If you are unable to repay the loan when it becomes due, you can choose to roll it over to the following month which is typically your next payday. However, this method is always costly in the sense that the interest accumulates. Some lenders give these loans on a long-term basis and seek authorization to electronically withdraw multiple payments from your bank account on each pay date. It is not mandatory to have a good credit score and getting approved is easier than other traditional loans. This makes them quite popular among the people experiencing financial difficulty. Payday loans vary from state to state and range in size from $100 to $1000.The finance charge, on the other hand, ranges from $15 to $30 if you want to borrow $100 and these loans can accrue interests of between 390 to 780% if you roll them over on multiple occasions. Higher rates are witnessed in states that do not cap the maximum cost.

What are the Requirements to Get a Payday Loan?

There are three major requirements to get a payday loan. These include an open bank account in good standing, identification and a steady source of income. You are not asked any questions by the lender to determine your ability to repay the loan. It is worth noting that these loans are based on the lender’s ability to collect the money and not on your ability to repay. This factor creates a “debt” trap.

What are the Advantages of Payday Loans?

The biggest advantage of these loans over bank loans is their flexibility. They have longer hours and more locations than most banks. They rarely check your credit, making them a viable option if you have a bad credit. Besides, their privacy and expediency plus a fast loan application process make them appealing to the majority of the low-income population.

How safe are Payday Loans?

Payday loans are extremely expensive and you can end up paying as much as $20 for $100 loan for two weeks. The major limitation is always their cost. They are not the best option if you are having financial difficulties because they can only worsen your situation. You can turn to them only on a few occasions in case of an emergency. You can get overdraft charges if the bouncing checks you write to the payday loan establishment end up on your ChexSystems.This can make it difficult for bankers and retailers to work with you. Besides, the lender can send your account to collections or sue you if you are unable to repay, damaging your credit in the process. Banks and other federal organizations have always accused payday lenders of taking advantage of the low-income population.

What are some of the Payday Lenders?

Payday loans are made either by payday loan stores or at stores that offer other financial services such as title-loans, check cashing, rent-to-own and pawn depending on state-licensing requirements.

What about Bank Payday Loans?

Banks have also moved into the payday loan industry with a clear intention to earn more revenue. The bank payday loans may come with different names but just like the other payday loans, their effects are no different. rnBank payday loans can even be worse than what you get from a payday loan store because the bank has complete access to your banking account and has the authorization to pull funds from your account to repay the loan. This can complicate your financial situation if they decide to take their money when you have not made other important payments such as car payments or a mortgage. Nevertheless, you can still get the loan from your bank with a belief that it may offer better terms.

Are There Any Alternatives to Payday Loans?

There are valuable options you can consider in place of these risky loans. For instance, you can build an emergency cash fund to cover for unexpected expenses instead of going for the expensive payday loans. Other methods include building credit, getting unsecured loans, looking for part-time jobs for extra cash or peer to peer lending services among others.

What is the Legal Status for Payday Lending?

High-cost payday loans are authorized by rules and regulations in thirty-two states. The District of Columbia and fifteen states protect their residents from high-cost payday lending with favorable small loan rate caps and other prohibitions. Furthermore, three states set longer terms or lower rate caps for less expensive loans. Online payday lenders are also available but they are subject to the state licensing laws and rate caps of the parent state.

What are the Protections for Service Members and Dependents?

Active-duty service members and their dependents are forbidden from getting payday loans. Federal protections under the Military Lending Act (MLA) took effect on October 1, 2007, with a further expansion on October 3, 2016. The members apply to loans subject to the federal Truth in Lending Act including title and payday loans. However, the lenders are prohibited from major activities including taking a check, charging more than 36% in annual interest rate, using compulsory arbitration clauses in contracts for covered loans and using car titles or debit authorization to secure loans.

What are the “Defensive” Points from Payday Lenders?

The payday industry argues that their loans are the best option because they can be less expensive than bounced check fees and overdraft protection programs. Besides, they also state that their lending system can be the ideal easy and quick way for a majority to get money.

Bottom Line

It is clear that payday loans can be equally important but it is worth understanding the risks involved in looking to get one to cover your financial needs. Better still, you can consider some of the alternatives highlighted in this article. Make a wise decision moving forward as far as personal loans are concerned but it is always advisable to choose what suits you best.