What is a payday loan?

If you are in immediate need of money, but you don’t qualify to take out a personal loan, you can take out a payday loan. You can also get a next business day deposit payday loan, which is quick and convenient. Usually, payday loans have very high-interest rates, so there is a limit to how much of a loan you can take out. In this article, we will talk about what exactly a payday loan is and the pros and cons of taking out payday loans.

What exactly is a payday loan?

Payday loans are short-term and small, which can be repaid to the bank when you get your next paycheck. These loans are outstanding because you don’t need a credit check to take out the loan. However, there is a limit on how much money you can take out when you take a payday loan, typically up to $500. In some states, you can find storefront payday lenders, or you can even take out a payday loan online.

Features of payday loans:

  • Payday loans come in small amounts, typically, with a cap at $500.
  • There is a high-interest rate.
  • Payday loans are paid off in one payment and not in installments like regular loans.
  • The due date for repayment of payday loans is generally 2-4 weeks from the day of taking the loan. The final date for repayment is set in pen in the payday loan agreement.
  • To repay the loan amount, you have to write a check for the total amount lent, generally including all the loan application fees incurred when processing the loan. This check is post-dated as insurance so the bank can cash it if you don’t pay the amount on the due date. The other way to repay the bank is to authorize them to debit the amount from your bank account or card. If you fail to do this, the bank will make an instant decision to debit the amount from your bank account electronically.

How much does a payday loan cost?

The amount you have to pay for getting a payday loan is different in different states. Most state laws have a maximum amount of money that a consumer can borrow from a payday lender, typically $500. The maximum loan amount fees for this is set at a range between $10 to $30 for every $100 that consumers borrow. For example, if you borrow only $100, the fees will be between $30-$50, but if you borrow $200, the fees will be double what you paid for $100.

The Annual Percentage Rate (APR) is calculated at a very high number for even a minimal payday loan application fee like $10 or $15. If your fees are $15 on a two-week repayment plan, the APR goes up about 400 percent. This is why these loans are high-risk and high interest, not long-term.

How is a payday loan different from a regular loan?

One of the main features that differentiate a payday loan from a regular loan is the due date for repayment. It is typically just two weeks later for payday loans, whereas, for regular loans, you can take up to 5 years or even more, depending on your credit check. Another difference is the amount borrowed is small with payday loans, but if you take out a regular loan, you can borrow a large sum of money.

How long do you have to pay back a payday loan?

The payback due dates for payday loans are different for various states and regions. Typically, you get a 2 weeks’ timeline to repay your loan, or you can extend it to 4 weeks, depending on when your next paycheck is.

However, there are minor exceptions to this rule. For example, while payday loans are generally repaid in the total amount at one go, some banks may allow the consumer to pay only the recurring loan application fees from the loan processing fees and extend the actual due date. Additionally, some banks allow consumers to pay the money back in installments over a more extended period than just the typical 2-4 weeks’ notice.

Pros and cons

Pros:

Payday loans have very minimal requirements
Payday loans allow financial independence to the borrower
No thorough credit score check at traditional credit check bureaus
It saves you extra expenses from overdrafts from the bank, bounced checks and overdue credit card fees.

Cons:

You can’t take out a payday loan for longer duration’s
High interest and fee payments
You need to be at least part-time employed to get approved
You also need an active bank account or a credit card in your name.
You can only take payday loans for small amounts of money.

What are the best alternatives to Payday Loans?

Personal loan:
Personal loans
typically have a lower APR than payday loans. You also get more time to repay the loan amount.

Invest free cash app:
Chime, Earnin, and Dave are examples of mobile apps you can use to get advances on your paycheck without an interest rate. You do have to qualify for using the payday loan feature in the app, but this is a much better alternative to paying high-interest rates to a payday lender.

Community:
If your needs are essential and authentic, many community organizations are willing to loan you small sums of money.

Borrow money:
If you are in a very tight spot and need the money immediately, you can ask your family and friends to help you out. This saves you the trouble of going through a credit check. You will most likely not have to pay an interest rate, or at least it will be very minimal compared to a payday loan interest.

Which states allow payday loans?

Alaska

Alabama

Illinois

Florida

California

Hawaii

Idaho

Indiana

Nebraska

Minnesota

Oklahoma

Delaware

Mississippi

Kentucky

Missouri

South Carolina

Nevada

Iowa

Kansas

North Dakota

Ohio

Rhode Island

Tennessee

Louisiana

Michigan

Texas

Utah

Virginia

Washington

Wisconsin

Wyoming

Summary

While they may be borderline predatory, payday loans are a quick and easy solution for emergencies. As long as you pay off your debt on time, payday loans shouldn’t be a problem. However, it is always better to look for an alternative to avoid paying sky-high payday loan application fees.

Some states entirely ban the existence of payday loans because of the high-interest rate and high risk it carries. The payday loan lender or the bank is not responsible for your inability to meet other financial obligations you may have. Therefore, these loans are only for emergencies and exceptional cases where you have to get a loan immediately.

 

 

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