If you’re struggling to pay your bills until your next paycheck, you may need a payday loan. But, how do payday loans work? Find out more in this article.
A significant 12 million Americans take out payday loans each year.
Collectively, they spend $9 billion on loan fees to cover these short-term loans.
You may have seen payday loans pop up on television commercials or in other advertisements, but do you know what they actually are? Why do so many Americans rely on them?
You may also be wondering, “How do payday loans work?”
In this article, we’ll go over what payday loans entail and whether they might be the right short-term solution for you or your family.
Read on for a simple primer in payday loans.
What is a Payday Loan?
A payday loan is a short-term loan that gets you through a tight financial situation. Research shows that 69% of people using payday loans get them for everyday expenses.
The term “payday” refers to the fact that you’ll need the money in advance of your next payday. When your payday comes, you’ll pay the money back to the lender.
As such, the life of the loans is relatively short, typically just a few weeks. Your loan will be due back in full at the appointed time.
If you can’t repay it at the appointed time, often times the loan renews and rolls over. This can include a high-interest fee that you’ll be responsible for in addition to the principle you borrowed.
How Do Payday Loans Work?
A payday loan is generally a loan with an extremely high interest rate. Sometimes, the APR (annual percentage rate) could be as much as 400% of the actual amount of money you borrowed. This could mean if you put off repaying your loan for a year, you would owe the loan, plus 400% of the loan as interest.
The can work in a variety of ways. However, they often work by an individual writing a check for the loan amount plus interest to the loan provider. The loan provider then gives them the loan money. They will then cash the check, plus the interest, on a certain date.
As stated previously, sometimes a check is not necessary as collateral. But, if a check is not issued, there may be other ways to ensure that their lenders pay the money back.
Breaking Down the APR
Payday loan lending is now regulated, but even with regulations in place, it can easily get out of control.
If you borrow $100 for two weeks, with an interest rate of $15, your interest rate is 15%. However, because of the length of time you have to pay back the loan is expedited, that is an APR of almost 400%. This is because the interest per day of a 14-day loan of $100 with a 15% interest rate is $1.07 per day.
As a result, you get a very high APR to go with your payday loan.
Why Use a Payday Loan?
Although the high APR rates may have scared you off, they shouldn’t necessarily. Millions of Americans use them every month to get by. They can help fill in the gaps for utilities and other bills, or help when something, like a medical or dental bill, suddenly comes up.
Most people who use payday loans do not have good credit. This is because, with a payday loan, credit is not necessarily considered when deciding whether to issue a loan. Many places will approve almost anyone instantly. This is a great relief to those who are just starting to build credit, who have not been able to do so for one reason or another.
How Much Can I Get with a Payday Loan?
A payday loan isn’t about getting the money to buy a house or pay for college. Instead, it’s about quick cash immediately.
You can get anywhere from $100 to $1,000 with a payday loan, typically. There may be limits depending on what state you’re in or whether the loaning institution is willing to lend it to you.
Some states have relatively low caps, only giving you $300 or so for a payday loan. Others allow you to take out as much as $1,000.
Some direct payday lenders will allow you to take out as much as $5,000.
On average, most people borrow about $350 per item.
Who Issues Payday Loans?
Payday loans are now regulated by the government. Banks cannot issue loans less than $5,000 without credit regulations, which makes them ineligible to run payday loans.
Each state has its own regulations for payday lenders.
They often operate as their own business and are often times stand-alone stores.
How Do You Pay Back a Payday Loan?
There are several ways to pay back a payday loan.
You may pay back a payday loan by setting up a direct deposit. The payday loan company will then take the money out of your bank account each month, or when it is due.
You can also give the lender a check to be cashed at a certain date, or talk to him or her about terms for repayment.
Do Payday Loans Affect My Credit?
No. Requesting a payday loan, taking out a payday loan or even defaulting on a loan does not affect your credit score. This is partially why it is so appealing to many individuals.
Is a Payday Loan a Good Solution for Me?
Hopefully, you’ve come away from this article with an answer to the question, “How do payday loans work?”
However, it is up to you whether or not you want to access a payday loan. If you know you can pay the money back immediately, it may be a good temporary solution to your financial woes. But if you think you may get caught in a cycle of debt, it is probably something to think about first.
For more money matters tips, check out our advice!