How Do Payday Loans Work, and What Are Your Alternatives? - Blog

It’s the Monday after payday. You already used most of Friday’s pay to cover bills and buy groceries, but you’re stuck on the side of the road with a broken-down car and you’re not sure how you’ll cover the repairs. At the same time, you need the car to get to work so you can earn that next paycheck.

You might be wondering if a payday loan is right for you.

Find out more about how payday loans work below — and get some info on alternatives — so you can make an educated decision no matter what your current emergency money need is.

What Is a Payday Loan?

A payday loan is a short-term loan meant to be paid back the next time (or two) that you get paid. The purpose of these loans is not to provide a long-term financial solution but to solve an immediate cash-flow problem — usually when someone is facing an emergency or urgent situation.

Some reasons people take out payday loans can include:

To cover urgent and unplanned expenses such as an uninsured trip to the doctor, a repair to the home AC system, or the purchase of a new tool for work if an old one breaks.
To make ends meet for a week or two if an unplanned expense or other issue has left the family without enough to buy groceries or pay for other necessary items.
To cover the cost of an unnecessary purchase that is limited by time, such as an item that is on sale only for the weekend.

How Do Payday Loans Work?

But are payday loans a good idea, even if you’re facing an urgent situation? To make this decision for yourself, you should understand how payday loans work. Here’s a step-by-step guide to the most common version of the traditional payday loan.

You need a relatively small amount of money quickly for any reason. Remember that with payday loans, the idea is that your next paycheck can pay off the loan (or your next two paychecks). Given that you still have to fund living expenses, such as rent, gas, and groceries, this tends to limit how much a payday loan can realistically be.
You borrow the money from a payday loan lender. The lender agrees to loan the money for a few weeks and usually not longer than a month.
The lender charges a finance fee for its trouble. Average payday loan finance fees can be $15 per $100 borrowed. So, if you borrow $500, that’s $75 in finance fees.
You pay the amount back on payday. In the above example, your next paycheck would be reduced by $575 (or $288 if you’re paying the loan back over two paydays).
The payment is automated. In most cases, the payday loan lender requires that you sign up for automated payments out of your checking account, ensuring that the money is paid back as agreed.

What Is the Interest on Payday Loans?

You might have noticed that the phrase “interest rate” wasn’t used in the above guide to how payday loans work. That’s because payday loans aren’t installment loans, so you’re not paying back the money over a period of months at a specified interest rate.

That doesn’t mean payday loans don’t cost you any money. The finance fees can stack up high, and when taken in tandem with the requirement that the loan is paid back within a pay cycle or two, you may be looking at a seriously choked-off cash flow.

What Is the Payday Loan Trap?

You might have heard the myth that payday loans are purposefully impossible to pay off so that lenders can trap borrowers into a rolling scheme of finance fees. This isn’t actually true, but that doesn’t mean that the payday loan trap is nonexistent.

Here’s how the payday loan trap might work in reality:

You take out a payday loan that (on paper) you can payback. The lender is supposed to be obligated to ensure you actually can pay the loan back and provide a reasonable way for doing so.
But life happens. Your grocery bill was higher than expected this week, you got a flat tire and had to replace it, or your child was sick and you needed to pay for urgent care and some medications. For whatever reason, your next paycheck has to stretch farther than you expected.
You roll the payday loan into a new payday loan. This means that you borrow the amount you need to pay back the current loan — including the finance fee. You’re also charged a new finance fee. So, if you borrowed $500 with a $75 fee at first, you now need to borrow $575. Perhaps the lender has a roll-over fee of $50, which means you now owe $625.

It’s possible that another series of events could leave you unable to pay again the next time, and you could roll the $625 over into a loan that you now owe $675 on. Many legitimate payday lenders have rules in place to limit this type of activity, but it still leaves you owing a large finance fee for a very short-term loan.

Why Consider a Personal Loan Instead of a Payday Loan?

What do you do if you’re faced with a situation that requires fast cash but you don’t want to get caught in a payday loan cycle? You might want to consider a fast personal loan online.

We offer personal installment loans that you can apply for in just a few minutes. If you qualify for the loan — and you don’t need great credit to do so — we can get your funds to you the same day or the next day, depending on what time of day you completed the application.

As you may have noticed, many of these perks are the same as those you would get with a payday loan. Except with an installment loan you get some potential advantages that most payday lenders can’t offer:

The repayment terms can cover a few months or a year or two, depending on your loan. Either way, your payments are broken up into much more affordable options than you might find with a traditional payday loan. For example, a $700 loan in Louisiana for 5 months might result in a payment every 2 weeks of $131, allowing you to spread the payments out into more manageable amounts so you can keep more of each paycheck. Our loan terms are six months for all states, and (for residents of every state but Texas) you can request a longer repayment period.
Installment loans may help you build credit. Your on-time payments on personal loans will be reported to the credit bureaus, which is something that traditional payday loan lenders typically don’t do.

Ultimately, whether or not a payday loan is right for you is a personal decision. But that’s true of any type of credit. Make sure you’re informed about your own credit history, understand what you can and can’t afford, and research your options when it comes to loans before you start applying.

Frequently Asked Questions

How can I get instant cash?

You have two options to quickly make money, but they both come with risks. The first is to sell products online on Amazon and eBay. These sites can help you make quick cash by selling products. However, there are many risks involved when doing this. If you don’t pay attention to details, you can lose a lot. If you don’t have the right knowledge, these opportunities might not be worth your time. You also run the risk of losing all the money you made if the website where you sold your product goes bankrupt.

Asking for help is the second option. This can be done by asking family and friends for financial assistance. However, you need to be careful here too. People will probably refuse to give you money if you ask them for it without giving anything back. If you ask for money in a time when you aren’t having enough money, you won’t be able to earn any additional money. Finally, if you find yourself in trouble again, you’ll still need to ask someone else for money.

So, while it’s possible to get money fast through these methods, it seems like a risky way to do things.

How can I get free money today?

While this isn’t easy, you have to make a plan. Make sure you have an action plan to take advantage of the opportunity. Make sure you do your research before you jump on any bad deals.

It is also important to plan what you will do with the money. This might include getting support from family and friends. This could be buying a house or starting a company. No matter what your goal is, you must act now in order to reap the benefits once you have borrowed the funds.

Is it possible to get a loan if you have a low credit score?

It depends on which type of loan you choose. It is possible to apply for an unsecure personal loan. If you apply for a secured loan like a car finance or home improvement loan, however, your credit rating will be higher.

Paying off your debts on time can help improve credit ratings. You should also pay extra money towards your monthly repayments to help improve your credit rating.

How much do you pay back on a payday loan?

To ensure that you have enough cash in case you ever need it, you should always have an emergency fund. It shouldn’t matter if you have a strict budget and are careful with where you spend your money.

What is a payday loan?

A payday loan is the most popular type of loan. This short-term loan is taken against future paychecks. These loans have typically higher interest rates than personal loans.

The borrower must repay money within 2 weeks of receiving the next paycheck. He can lose the whole or part of the loan amount if he fails.

Payday lenders are known for charging high fees for short-term loans. They are more likely to target people in financial distress. They are an easy way for borrowers fall in debt.

What should I consider if I’m thinking about getting a payday loan online?

It is essential to know what you are signing for when you apply online payday loans.

There are many options depending on how much you have and whereabouts.

Make sure you thoroughly investigate the details of every company to which you are applying. You should not sign anything if they don’t give enough information.

Before you apply for a payday loan, make sure to look at these key points:

Information about their fees, penalties and repayment terms
Contact information including phone numbers, email addresses, and website address
They must show proof that they have the right to operate in your state
Details about additional services they offer (such as fax-less payday loans)
Contact form to ask questions via their website
Cancellation of your agreement without penalty
The possibility to get a loan even if you already owe another lender
How soon will you receive the funds once your application was approved?
Guarantees that they won’t charge extra fees or add any charges later
How long it takes you to repay your loans
What happens if payments are not made?
Your right to dispute the debt
Any legal recourse against them if there is a problem with the loan
If they will report your payment history and send it to a collection agency
Their policies on late payments and defaulted loans
How long they keep your records
They provide excellent customer service
How fast they respond to messages
What happens if they close?
It is so easy to find another lender
What should you do if there’s a problem?
They are not allowing hidden fees to be charged.
How can they tackle identity theft problems?
What happens if there is a problem?
What security measures are they taking?
Is the company requiring you to be a citizen of certain states?
They do they conduct third-party checks
Are they BBB certified?
Do you have a list of complaints?
How to complain/file a complaint
What laws protect consumers using online lenders

How big of a loan can I get with no credit?

If you don’t have $1000 in liquid assets or are willing to be collateral, you won’t get any type of loan. If you don’t have these assets, you will likely lose money on the loan.

However, if there are investments or savings that can be used as collateral you should be okay.

You can also use a 401k plan that your employer provided as collateral.

What is an urgent loan?

An emergency loan is a short term loan that you can get when you have unexpected financial circumstances. This helps you cover your expenses until you can pay off your debt.

An emergency loan may help you pay for unexpected bills or other costs.

If you’re unemployed or have lost your job recently, you may be eligible for an emergency loan. If your car suddenly breaks down, you may also require an emergency loan.

An emergency loan is available immediately. You should apply for an emergency loan as soon as you can to get the best terms.

You should never take out an urgent loan unless you are absolutely desperate. A higher interest rate will result.

If you are in dire financial straits and don’t know what to do, borrow as little money as possible. You can get a loan from $100 to $200 instead of thousands.

This way, you can pay back your debt faster without paying more in fees.

How does payday loan interest work?

Payday loans are often used by customers who need cash fast and have bad credit.

These loans have an average interest rate between 300% and 1000%.

Interest rates for payday loans are usually determined by the borrower’s credit score, repayment capacity, and other factors.

The higher the credit score, the lower the interest rate.

It is best not to borrow money if your monthly earnings are less than $1,000.

You should consider personal loans if your monthly income is within the range.

You should consider other options if you make more than $1,000 per monthly.

What if I don’t have a credit check?

Answer: Yes! Here are 6 ways that you can get online loans without credit checks:

CashNetUSA.com – Apply online for a payday loan – No Faxing, Waiting, and No Hassle. You just need to approve and pay.
LendingClub.com offers an online personal loan. Interest rates as low at 1%, no credit checks and bad credit OK.
Prosper.com provides an online installment loan with 0% interest on balance transfers and purchases.
Apply for an online auto title loan from AutoTitleLoans.net – Get approved the same day. Get money in 2 hours.
LendUp.com enables fast cash transfers to your account within 24 hours.
BizLineLoan.com provides an online loan for a business line of credit.

Cash App lets you borrow money

The answer is yes! You can borrow money from your friends and family using the app. You can also pay them back with your funds if they don’t have enough cash.

The best thing? It’s free — there are no fees for borrowing or repaying. You will need an active account in order to use this feature.

What is a hardship loan?

A hardship loan is a type of mortgage where you have to prove why you need the money for an unforeseen emergency rather than just saving for it. This could be because you’ve lost your job or are ill.

This may be the loan for you if your credit is not good enough for other types of loans.

What are Payday loans most commonly used for?

Payday loans are used to meet short-term financial requirements when the borrower does not have sufficient funds to pay for bills or other expenses. The borrower gets a cash advance from a lender who agrees to provide funds at very high-interest rates. This type of loan is commonly called a “payday loan”, as the borrower typically uses it to pay their bills until they get paid.

While payday loans are sometimes considered last-resort options, many people resort to them when they require quick cash access and don’t want long waits at banks.

Cash advances can be attractive for those who are trapped by mounting debt, who cannot afford credit card payment, or simply don’t have enough time to go to the bank to apply for a traditional loan.

Many consumers believe that using payday loans is less risky than taking out a larger loan, which could lead to problems such as missed mortgage payments and repossession of property if the borrower misses several payments. The majority of states do require that lenders charge higher fees for loans.

Payday loans should be repaid within 14 days. Remember that you will be required to pay additional fees each day you borrow the money. The amount of money borrowed will determine the fees, but lenders typically charge $15 per $100. You can find more information about payday loans online.

Speedy Cash checks your credit?

Many lenders use credit checks to protect their customers from fraud and help them find people who are not eligible for financing. However, do credit checks increase your chances of being approved for a loan or decrease your chances of getting one?

The short answer to this question is yes. Consumer reports may have been able to help millions of Americans get loans for their homes by avoiding predatory lending practices, according to evidence.

Consumers need to know that these reports can have a significant cost, which can discourage borrowers from applying financially.

Other than the lender reviewing your credit reports, other factors can affect your credit scores. Your score can drop if your payments are not on time or you miss several months of payments. This is because missed payments are a sign of poor credit history.

It’s important to note that not all lenders check your credit report before approving you for a loan. Some lenders only examine your credit report once or twice during an application process. Others won’t.

Before you sign up for any type a loan, be sure to understand the information being provided about you. Do you want anyone to have your financial details?

Statistics

A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. (consumerfinance.gov)
If you’re preparing your bank account for the charges that WeLoans will cost to find a lender, put that thought aside because it’s 100% free. (abcactionnews.com)
Cons Up to 8% origination fee (abcactionnews.com)
Unlike other personal loans, payday loans often feature interest rates ranging from 391% to 600%. (timesunion.com)
In California, for example, a payday lender can charge a 14-day APR of 460% for a $100 loan.6 Finance charges on these loans also are a significant factor to consider, as the average fee is $15 per $100 loan.1 (investopedia.com)

External Links

consumer.ftc.gov

- FAQs about Debt Collection

americanbanker.com

- Startup FlexWage offers alternatives to payday loans under scrutiny

- Colorado’s Payday loan reforms offer blueprint for CFPB

How To

Why are we looking for installment loans?

Installment loans, which are short-term loans, require a minimum monthly payment. They typically last one year and allow for flexible repayment options. It’s very convenient because it allows you to repay your loan when you want and have the money available.

Most people who apply for these loans are looking to make some quick cash and don’t care too much about their credit score. If you are unable to qualify for traditional bank financing, then an installment loan may be an option.

You should carefully consider how much you borrow before applying for an installment loan. You need enough capital to cover the cost of interest and fees, plus another month’s worth of payments.

When you’re approved for an installation loan, you should receive your funds within 24 hours. The application fee for an installment loan is typically $40. You will be charged an extra fee by most lenders for this service. Compare offers until you find a good deal.

Installment loans are a great option if it’s difficult to pay your monthly bills on time. This type of loan is perfect for those with bad credit scores who face financial hardship.

If your traditional bank has rejected you and you don’t have collateral, an instalment loan might be the best option. Your income, employment history and assets will all be considered by your lender. If you prove to them that you can repay the loan they will approve you for a lower amount than you owe. Therefore, you won’t have the ability to pay off your total debt right away. Instead, you’ll have to pay off a portion of it every month.

With an installment loan, you will be responsible for paying back the entire balance in full before getting a refund. Most lenders offer grace period during which you may delay your payments without being charged late fees.

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