How Do PayDay Loans Work Exactly?
Payday loans also known as check-advance loans or check loans are unsecured, short-term loans that people take out in between pay periods to help finance urgent or difficult times. They are usually made out in small amounts of no more than approximately $1000 and for a term of about two weeks or until your next pay day.
These are considered to be very controversial loans in that critics consider the lenders to target the poor and rank lenders in the category of loan sharks due to the excessively high interest rates which can go upwards of 800% APR.
It’s very easy to get a payday loan as long as you are eighteen years of age plus. You can get them with little to no credit.
To apply for a loan can be done online or in person at one of their stores. When you go into the store, the rep will have you fill out a short application inclusive of giving two references. The required paperwork to bring with you includes a paycheck stub, bank statement, social security card, proof of residence depending on the state–this may or may not be required, state-issued ID and a blank check that will be post-dated and filled out with the amount you are going to borrow plus the finance charge.
The rep will not do any kind of check to see if you can afford to pay the loan back or not. They just want to be sure you have an income, what the income is, and that you have a bank account. They approve the amount of the loan based on what your income is on your paycheck stub.
After they approve you, they ask that you fill in the check with the amount of the loan plus a finance charge, generally between $15 to $30 plus any other fees that may have been included in the contract that you signed. You turn the check over to them with the knowledge that your payment will be due in two weeks when you are due to be paid again.
On pay day, you can either come back into the store and redeem your check by paying them the loan amount in full in cash, the store can deposit your check to get their payment, or you can come in and pay a second finance charge to roll the loan over for another two-week period if you find that you don’t have the money to repay the loan. With the third scenario, you are accruing a heck of a lot of interest on the loan.
This is how folks get themselves in a boatload of trouble. For the most part, people take payday loans out because they are in trouble financially already. They can’t pay an important bill, e.g. rent, electric, car or they have an emergent expense like medical. These loans get them through that crisis. Quick cash when they need it without any hassle.
What they don’t think about is it only prolongs the problem until the next pay cycle. Then they still can’t pay whatever it was they couldn’t pay the first time, but this time they have the addition of the loan. Now, they can’t pay the rent or this loan. The answer, either roll the loan over or take out more money. You really have to think before you take out a payday loan or any loan.
- Focus on the purpose
- Do you really have to do it?
- What do you plan to do with it?
- Is it really that important…a necessity?
- Weigh the pros and cons.
- Have you looked into other options, e.g. friends/family, selling things, a side gig.
After you find that it is something that you absolutely have to do, there’s just no way around it, no alternative, do your research. Don’t just go out and dive into the first place you find.
- Check reviews online of the place your considering.
- Check them out with the Better Business Bureau.
- Check your state for their licensing and registration
- Be aware of lending laws for your state. They vary with each state.
Make sure you don’t have to pay any kind of upfront fees. These should be able to be paid when you pay your first payment.
If it seems to good to be true, it usually is. Read every word of the contract carefully. Make sure there are no hidden fees or anything else that you don’t like. Don’t take a loan that you don’t like the terms for. Don’t sign something you haven’t read.
Make sure that your next pay check will cover the amount of the loan in full and that you won’t have to roll over the loan to a second term.
Make sure to go to the physical address and speak to someone face to face. Don’t do anything on line. It is very difficult to track a wire transfer,and they are usually not done in the United States.
There are proponents to the payday loans and critics. The biggest problem is the interest rate and the fact that people are allowed to take out loan after loan after loan without anybody paying attention to how many loans these people are taking out or managing whether they can afford to pay for them or not. So these folks are so in debt they lose everything. They’re creating debt cycles they can’t recover from.
Legislators are trying to put regulations on the payday stores where they have guidelines that will show them whether a customer will be able to pay the loan back or not before they just pass the loans out to everybody who comes in. This will save a multitude of customers from financial ruin.
Some states are also regulating that the stores advise the customers when they come in what the terms, fees and interest rates are verbally instead of just putting it in their contracts. Some states are trying to ban payday loans all together.
Proponents of the payday loans don’t want to see the loans go away. The low to middle class folks need a resource, particularly those with little to no credit. There is nowhere else for these people to go if they have an emergency or if they can’t pay their bills. They need a place to rely on where they can get cash in a hurry and, right now, the payday loans are their lifeline.
TIPS TO SAFELY PAYOFF PAYDAY LOANS
Stop borrowing. Don’t reuse a new loan in order to payoff a previous one. The interest will only further eat away at your income.Your minimum payment must cover the interest fees. You’ll want to pay any amount over that to bring that principal balance down. Do whatever you have to, e.g. count out change, lower your grocery bill. If you can’t afford to pay the full balance, scrape together as much as possible which will lower the interest with the next term.
Look for a side gig that you can do during that two weeks. It’ll be better to use that than having to take from your main income when the payment comes do. Then it won’t affect your regular monthly bills.
– The payday loan debt is a higher priority than any credit card debt you may have so use any money you would normally put on them to pay this loan down.
– Even if it rolls over a time or two, keep at it with the same diligence and get it gone, trying to make the next time the last time.
– After you get it paid off and see that you can do it, try to use these same tactics to get the rest of your finances in order so you don’t have to go this route again. Start with higher interest debt and pay off other creditors with the same methods.
PROS AND CONS OF PAYDAY LOANS
- Short term for relatively small amount
- Little or no credit required
- Receive several hundred dollars in a day
- Only requirements are income, bank and ID
- Can be used for anything, no explanation
- Takes less than an hour to process
- Small amount of money compared to other loan types
- Borrowers have difficulty paying loans back which is severely damaging to credit
- Come with very high interest rates
- It is recommended to avoid payday loans as they lead to debt cycles, however, are at times necessary due to desperate measures
- These loans should be paid in full to avoid recurring fees
These loans offer a very simplistic process to go through in order to obtain one. There’s no hassle, very self explanatory. The only real requirement is to read the contract very thoroughly making sure you understand every single word so you know exactly what the terms are. The other thing is to be sure you have the money to pay it in full when pay day comes so you can avoid excessive interest rates. Other than that, it’s a good solution when you have an emergent need for cash in a hurry.
David is a financial expert who graduated from the University of Fordham (Master in Finance) in 2001. He has 10+ years of experience in private equity and wealth management. With strong expertise in senior-level financial planning, personal financial analysis, and mortgages, David knows his way around personal finance. Before working at CCR he used to be a financial analyst at McKinsey.
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