When we find ourselves in a situation where we urgently need money, we consider all options and are ready to grab the first offer in order to resolve our issue as quickly as possible. If you need a small amount of money, like $500, getting a payday loan often comes to mind first. This is a popular solution among Americans that does not require time or unnecessary complexity.
But what is a payday loan, how does it work, and how to get it?
How Do Payday Loans Work
Payday loans and their receipt are organized as simply as possible.
You provide the lender with your personal data, and if you meet the minimum criteria, then after a minimum credit check or without it at all, you receive money in your bank account.
Payday loans are so-called because they are available for a period until your next paycheck. This is usually 14 to 31 days.
If you applied for a loan in a physical store, then you will need to bring the money on the specified day. In the case of applying for a loan online, you provide the lender with your bank account details, and they will automatically withdraw funds on the due date.
How to Get a Payday Loan
Some lenders and services have their own representative offices in stores where you can come and apply for a loan, as well as sign all documents.
However, more and more people prefer to apply for a loan without leaving home, and this can be done online. At the moment, there are services with which you can get a no-faxing payday loan in a couple of clicks without letting go of your smartphone.
These services connect you to direct lenders who can approve your payday loan in as little as five minutes and deposit the money in your bank account the same day or the next business day.
Payday lenders do not conduct hard credit checks through the credit bureaus, using other databases to assess your solvency. Thanks to this, you do not have to wait weeks for loan approval, as in the case with traditional financial institutions like banks and credit unions.
Maximum Payday Loan Amount
A payday loan is a short-term loan that is limited in amount by state law. In most states, this is between $100 and $1,000, but in some states, the maximum loan amount is as low as $300 or $500.
This is a small loan you receive in one lump sum and repay in the same way after the expiration of the period specified in the loan agreement.
How Much Does a Payday Loan Cost
When planning to apply for a loan, we inevitably think about the interest rate of a payday loan.
The Consumer Financial Protection Bureau estimates that a payday lender will charge $10 to $30 for every $100 borrowed. So, for example, an APR of 391% is calculated if a payday lender charges $15 for a $100 two-week loan. For your convenience, when calculating the interest rate, you can use a handy calculator, which is quite easy to find on the net.
A fee is imposed, and the cycle repeats if the loan is not fully repaid on the first payday. This makes payday loan interest rates quite high but justified. Payday lenders risk their money by lending without hard credit checks, so high-interest rates are a way to protect yourself from possible losses.
Pros and Cons of Payday Loans
Although the idea of getting money quickly and easily by filling out an online request form is very attractive, you should weigh all the arguments before making a decision.
Like any other financial product, payday loans have their pros and cons, which should be taken into account when making a decision.
- It’s simple. You can place a request on the site in just a couple of clicks. It is enough to prepare the necessary documents in advance and have access to the Internet;
- It’s fast. It takes no more than five minutes to submit a request for approval. The money will be in your bank account on the same day or the next;
- Available to people with bad credit. If your credit history is not perfect, banks and credit unions may deny you a loan. In the case of payday loans, most lenders will approve your loan even if you have no credit history at all. However, you need to provide proof of income and have enough regular income to pay back your debt on time.
- Relatively high-interest rates;
- It will not help you to build credit.
Do Payday Loans Impact Your Credit?
The short answer is no.
In most cases, payday lenders do not conduct credit checks with the three major credit bureaus and do not send them your payment reports. Because of this, payday loans do not affect your credit score and cannot improve it even if you repay the loan on time.
However, in the event that you fail to repay the loan on time, do not inform the payday lender about this and delay payment for some time, your data will be transferred to a collection agency, and this will already lead to a deterioration in your credit score.
Payday Loan Alternatives
Despite the obvious advantages of payday loans, they may not be suitable for everyone. First, the maximum amount is not that big. Payday loans are small loans that are designed to meet a small financial need to solve emergency expenses and problems.
If you need a larger amount or for a longer period, you should consider other types of loans.
Also, if you have a high credit score and have not had any previous problems with your credit history, you may want to consider an alternative with a lower interest rate.
Payday Alternative Loan (PAL)
If you belong to a federally-insured credit union, see if they offer an alternative payday loan (PAL). There are two varieties: PAL I and PAL II. They are both small-dollar, unsecured loans. PALs have much lower interest rates than payday loans, with maximum repayment lengths of 12 months and a maximum annual percentage rate (APR) of 28%.
Finding PALs can be difficult because not all federal credit unions offer them. New credit union members would have to wait 30 days before they could borrow money with PAL I loans. PAL II loans, on the other hand, do not have this criterion and also have a greater borrowing cap and a longer repayment period. Both kinds of loans could need credit checks, depending on the credit union.
Credit Card Cash Advance
You might be able to obtain a cash advance if you have a credit card. It’s simple to receive a cash advance; all you have to do is use your card to make a withdrawal at an ATM or bank. However, doing so can be costly because cash advance APRs are substantially higher than purchase APRs, and there is a good chance that your cash advance will have a fee. Additionally, interest is charged immediately on cash advances, unlike purchases made with a credit card.
Personal loans can be obtained from a bank, a credit union, or also from an online lender. However, personal loans can be provided on more favorable terms, with a lower interest rate. Also, you can get a larger personal loan amount for a longer period. Furthermore, loan repayments can be made in equal monthly installments.
Another way to get money fast. A pawnshop is a secured loan where your personal valuables act as collateral. Therefore, the amount of such a loan will depend on how valuable your collateral is. You can also discuss the terms of the loan and other details directly at the pawnshop before agreeing.
What Can You Spend a Payday Loan On
Payday loan borrowers are not limited in how they can use the money they receive. Unlike a mortgage or a car loan, you will be able to use this loan for your personal needs and do not have to report it.
Paying medical debts, fixing a car, buying appliances, or money for a gift, you can use the money in any way you like.
Answering the question: “what is a payday loan”? We can say that this is a small short-term loan that you can get online and spend however you want. The main thing is to return the money on time.
FAQ: Payday Loans
Where can I get a payday loan?
You can apply for a payday loan at a payday storefront.
But the most popular way now is to get faxless payday loans online without leaving your home.
Payday loans: what do I need to get one?
To get an online payday loan, in most cases, you need to fill out an online request form and be approved by the payday lender.
Among the minimum criteria, you need to be an adult US citizen or permanent resident, have an active bank account, and a regular income of around $1,000.