Payday Loans 101: What You Need to Know
According to CNBC, about 11% of Americans have had payday loans. These figures prove that payday loans are very prevalent in the country.
Borrowing is a norm that has existed since time immemorial. People borrow for various reasons and in different ways. Payday loans are very prevalent in the modern-day world.
Have ever been financially stuck without no option for money whatsoever? Have you ever used your payslip as a last resort for getting some money? It is reasonable for circumstances to push you against the wall up to a point to consider a payday loan.
Paydays are different from other loans. They are deducted from your salary during payment.
How Do Paydays Loans Work?
In the US, only 37 states have permitted loans. If your state is among these, then you qualify for a cash advance from the upcoming paycheck. Payday loans are usually small and short term.
The amount you can borrow depends on the state. In some states, they have names such as deferred presentment, deferred deposit, or cash advance.
During issuance of the loan, the borrower can apply through the phone or in the paper. The lender then confirms the borrowers’ details, and if they qualify for the loan, money is wired to them.
In exchange, the lender asks the borrower to sign permission for electronic money withdrawal. This withdrawal is usually during the next payday, which always less than a month. Online lenders use automatic withdrawals and deposits.
In other situations, the payday loan can be sold to brokers who pitch for the highest bidders. However, this is a risky undertaking and is unauthorized in many places.
How Much Can You Borrow with A Payday Loan?
State laws govern the quantity you can borrow. Mostly, payday loan s are capped between $300 and $1000 depending on your ability to pay. The purpose of regulation is to control the system because many people can end up in financial misery.
Before issuing the loan, lenders check details such as expenses, income, and lending history. This helps the lender to determine how much you can reasonably pay back. Regulations require lenders to examine the payer’s financial situation before issuing loans.
The amount you can borrow also depends on your credit score. Lenders are willing to give you more if your score is above 600. Some can also give loans without a credit check, and you can read more here to find the ideal options for you.
Requirements for Getting Payday Loans
Payday loans aren’t as complicated as conventional loans. You don’t need a guarantor or security to secure a payday loan. To qualify for a payday loan, you need the following;
- Active bank account
- Proof of income (pay stub)
- An ID card (you must be above 18 years)
These you can produce these documents without any strain whatsoever. If your financial situation is acceptable, you qualify for the loan.
Disqualification for Payday Loans
In some instances, you may fail to secure a payday loan, even with proof of income. Having a pay stub is not a sufficient qualification, neither is it automatic qualification. These circumstances might deny you a payday loan;
- Lack of enough money. Lenders require a monthly net income of at least $500. If you don’t reach that threshold, then it might be difficult for you.
- Failure to meet payment requirements. Depending on the state’s regulation, there is a limit for the amount you can spend on payday loans. If the lender’s algorithm gauges a high risk of failing to pay, then you may be denied the loan
- Having an outstanding loan. If you have another loan in progress, the lender can deny you the loan. Majority of lenders subscribe to companies that provide real-time loan tracking.
- Active-duty military activity. The federal law does not permit the issuance of loans exceeding a 36% APR to active military members.
- Recent bankruptcy. If you have a bankruptcy history, then it might be hard to secure a payday loan.
- Bounced Checks. If you had bounced checks, the lenders might have some history.
- Lack of employment history. Many lenders require the borrowers to have been employed for some time to qualify for the loan. Working for a few months is not a sufficient guarantee for payday loans.
If you fall into any of these brackets, securing a loan might be difficult.
The Cost of Payday Loans
Majority of borrowers underestimate the cost of payday loans. Given the repayment duration, the cost of credit is very high. The online payday loan cost about $23 per every $100- this is a 613% APR.
The annual percentage rate (APR) is used in comparing the cost of payday loans. It includes all other expenses appertaining the loan.
This cost is high, and many people don’t do the math. If the loan isn’t paid in the first payday, it accumulates in the upcoming months. In some instances, the interest rate can get even higher than the actual loan.
It is due to this reason why payday loans are considered risky. Many people get stuck in a series of borrowing, which is very difficult to rescue yourself from.
Payday Loans and Credit Rating
The payday loan is likely to affect your credit rating. Many lenders don’t consider credit reports when issuing payday loans. Therefore, there is minimal effect on your credit score.
Failure to pay the loan may prompt the lender to report you to the bureaus. If the loan gets to the point of debt collectors, it can damage your credit score severely.
What Happens In case Of Defaulting
In some instances, a payday loan can be defaulted. Some people apply tricks to avoid paying the loan. Changing the pay point or engaging other deductions might lead to loan default.
If the borrower defaults paying the loan, the lender continues to withdraw money from the account. Each failed withdrawal attempt triggers fee increase.
If some situation arises and you are incapable of paying the loan, you can negotiate in good faith. Some lenders allow for negotiations with clients. Lenders can negotiate payday loans in case of situations such as severe medical conditions or accidents.
If the borrowers avoid payment willingly, the lender can file a lawsuit. A lawsuit is unlikely to happen, and if it does, it leaves behind a trace of consequences.
The Bottom Line
Although payday loans are helpful during financial woes, there are costly and very risky. Going for a payday loan should be the last resort but a quick-fix. Make your decision firmly to avoid the borrowing cycle.