Payday Loans: Everything You Need to Know Before Applying for a Payday Loan

Everything You Need to Know Before Applying for a Payday Loan

Some people who live paycheck to paycheck don’t have many options if they need money for emergency purposes. For many, their income is not even enough to cover some of the basic expenses. Therefore, a short-term loan seems like the most viable choice when money is required to meet an essential cost. However, the interest rates and fees are very high with short-term loans. Suppose you fall into that category of people. In that case, before you decide to get a payday loan, it is essential to know the risks associated with this type of loan.

What Is a Payday Loan?

Payday loans are short-term loans people opt for when they want to cover instant cash needs. They typically have small loan amount limits of about $500 or less, but they carry huge fees. They are called payday loans because borrowers are expected to pay back the loan by the next payday. Some payments are even due within just two weeks. In addition, the loan is not secured, meaning that collateral or assets do not back it. These loans are also commonly referred to as cash advance loans, post-dated check loans, or check advance loans.

How Does a Payday Loan Work?

How Does a Payday Loan Work

Payday loans are available online, or you can get them by physically going to a payday lender branch. All you have to do is fill out the application form online or at the payday lending office to get the loan. The general requirements for applying for a payday loan include a checking account, valid identification, and proof of income. One must also be an adult (18 years or older). You can get a loan amount of between $50 and $1,000, depending on the laws in your state. However, most loan amounts do not go past $500.

The loan application is usually approved instantly, and you will also be given the money immediately. Money is offered either as cash or as a check which you can be deposit into your bank account, in which case it will reflect in your account within one to two days. The annual percentage rate (APR) for a payday loan is between 391% and 521%, which is very high. The borrower is expected to pay off the loan amount by the next paycheck (within 14 to 30 days). The entire loan to be paid off will include the actual borrowed amount plus the applicable interest and charges.

How Is a Payday Loan Different from a Regular Loan?

A payday loan mainly differs from a traditional loan in that it is a short-term loan that has to be repaid within a month. On the other hand, one can pay off a regular loan over at least two years. The other notable difference is that payday loans have a much higher interest rate when compared with traditional loans.

Furthermore, the maximum amount you can borrow with a payday loan is $500 or less in most cases. Whereas the maximum amount is much higher with a conventional loan, the amount can be as much as $100,000 or more. Also, while a regular loan can take a couple of days to process, a payday loan can be approved instantly, and you will have the money immediately.

What Are the Drawbacks of Payday Loans?

What Are the Drawbacks of Payday Loans

A payday loan can be convenient when you need cash fast. However, it isn’t easy to manage. This is mainly because of the high-interest rates and fees. And, if you are someone who is living from paycheck to paycheck, the chances are that you may find it challenging to pay back the debt in full and on time. Therefore, it is essential to be aware of the following drawbacks before you apply for the loan:

1. Costly Fees

Apart from the very high interest rates, payday loans also have very high fees and additional charges. For instance, some lenders charge as much as $7 per day if past the due date.

2. High-Interest Rates

Although the interest rates differ based on the state you live in, the average interest rate for a payday loan is 400%. That is extremely high considering that the interest charged on personal loans is usually between 4% and 36%, and credit card interest is between 12% and 30%.

3. Restricted Borrowing Limits

Payday loans have small amount limits, usually $500 and below. The amount of money you can borrow usually depends on where you live. There are some states which do not allow payday loans at all.

4. You can get Further into Debt

Even though payday loans come in handy in emergencies, they have a high annual percentage rate (APR). Meaning that if you do not repay the loan on time, you may find yourself in a terrible cycle of debt. Because you already have limited funds, when you get a payday loan, the chances that you may end up sinking further into debt are quite high. The fact of the matter is that many people who opt for these loans struggle to pay off their debt on time and end up creating a cycle of debt.

Are Payday Loans Safe?

Are Payday Loans Safe

Although it may seem convenient to apply for a short-term loan from the comfort of your own home, it is important to be aware of the risks associated with online payday loans. For instance, many online payday lenders do not have a license. These unlicensed lenders usually give out illegal loans, which are often more expensive. You can avoid falling victim to these lenders by ensuring that you do not share personal information with a lender you haven’t carried out enough research on.

Who Regulates Payday Loan Companies?

Payday loan companies are regulated by the Consumer Financial Protection Bureau (CFPB).

Alternatives to Payday Loans

There are other options you can explore before you decide to apply for a payday loan, including:

1. Personal Loans

Suppose you are in a pinch and you need cash. Instead of applying for a payday loan that comes with extremely high interest rates, you can opt for a personal loan from a credit union or bank. A personal loan is a cheaper option because it attracts interest rates between 10% and 28%. In addition, you can get a secured or an unsecured personal loan. The secured loan requires collateral, while an unsecured personal loan does not.

2. Borrow money from a Friend or Relative

You can avoid the risks normally associated with payday loans by borrowing money from a relative or friend. However, if you decide to take that route, make sure that you agree in writing with the person you are borrowing from regarding the repayment plan. Also, make it clear what the course of action will be if you do not pay back the borrowed money on time or you fail to repay it entirely. Should you default in any way, the relative or friend that you have borrowed from can act accordingly in terms of the written agreement.

3. Credit Cards

Although credit card use is not usually advised, if you really need to buy essentials such as food and other necessary living expenses, it is better to use your credit card instead of getting a payday loan. However, it would be best if you didn’t make a habit of using credit cards every time you are in a fix.

4. Cash Advance

Another alternative to a payday loan is a credit card cash advance. This is in no way cheap, but it is a better option when compared to a payday loan. Most lenders charge borrowers a percentage of the advance as a fee, which is usually 5%. On average, the APR on these advances is around 25%.

A payday loan is a practical choice for emergencies that require money fast. The maximum amount you can get is $500. All that is required to get the loan is a valid identity document, proof of income, a bank account, and you must be 18 years or older.

Mark Jorel Snow

Mark Jorel Snow brings over 15 years of financial experience to help everyday people master their money. Mark is passionate about making complex financial topics simple. His down-to-earth explanations empower readers to take control of their finances with confidence. Mark specializes in creating tailored money strategies and providing unmatched personal support. When he's not coaching clients or penning his latest article, you can find Mark enjoying nature and time with family.

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