Payday loans (also referred to as cash advance loans or deferred deposit loans) are a type of short-term loan available to those needing access to immediate cash prior to an upcoming paycheck or income payment check, such as a social security check. Payday loans are high interest, unsecured loans with minimal requirements for approval.
Payday Loan Requirements
Qualifying for a payday loan is relatively quick and easy because of the minimal requirements needed. Lenders usually only require borrowers to have an open checking account, identification, and proof of employment or source of steady income (usually proven by showing previous pay stubs). Credit reports are not required to qualify for a loan, making it easier for those with bad credit to borrow money.
Payday Loan Terms
Typically, payday loans range from $100 to $1,000, depending on the state’s legal maximum or limits set by the lender. Terms on payday loans are short, with a maturity of about two weeks. Financial charges of payday loans are often fixed amounts, ranging from $5 to $10 on every $100 borrowed. When expressed as an annual percentage rate (APR), financial charges on loans can translate into interest rates of up to 400% APR.
Where to Find a Payday Loan
The payday loan industry is rather large, with a variety of businesses providing loans. Businesses that offer payday loans include: payday loan stores, check cashing centers, pawn shops, and some rent-to-own companies. Some companies offer the convenience of setting up a loan by phone or internet. However, many lenders are not licensed, bonded or regulated by important consumer laws.
Payday Loan Regulations
In 37 states, there are regulations or state laws authorizing payday loans. Usury laws are regulations that define permissible lending terms and rates. In addition to usury laws, laws in some states regulate the amount a payday lender can lend to a consumer and how much they can charge for loans.
On October 1, 2007, new federal protections were provided for Service members and their families. Department of Defense regulations prohibit payday loan lenders from charging more than 36% annual interest to all Service members and their families.
Payday Loan Process
After being qualified for a loan, the borrower provides the lender with a postdated check or a debit authorization, both for the full amount of the loan plus added financial charges. The lender then presents the borrower with documentation describing the full terms of the loan, including annual interest rates, late fees, and financial charges. By signing the documents the borrower understands and agrees to the terms of the loan, allowing them to receive their money.
On the maturity date, the borrower will be expected to pay the full amount of the loan to the lender. Some lenders may even provide borrowers with a payment plan to help ensure full payment is made. If a loan cannot be fully paid by the end of the term, the borrower may refinance (or “rollover”) the loan; however, this comes with late charges and additional interest fees.
If loans are left unpaid past the maturity day, lenders may process the postmarked check or debit authorization, depending on which was collected. If the borrower’s account declines the debit authorization or bounces the postmarked check, due to non-sufficient funds (NSF), the borrower will typically incur NSF charges to their account. Additionally, the lender may also impose a returned item fee plus collection charges on the loan.
Payday Loans – Positives and Negatives
When used responsibly, payday loans can be a quick and easy tool for generating cash needed for emergencies, such as car repair, medical bills, rent, utility bills, or other situations needing immediate payment. Payday loans are helpful for those without a credit card or any available savings. When the use of a payday loan can’t be avoided, borrowers should only advance an amount that can easily be repaid by their next paycheck. When payday loans are not paid back immediately, they can create financial struggles on the borrower. Many consumers who use payday loans live life paycheck-to-paycheck, leaving little room for financial emergencies. With the short terms and high interests of payday loans, it can be easy for these consumers to become trapped in a debt-cycle, where they have to repeatedly rollover their loan just to manage the fees associated with the loan.