What Is a Payday Loan and How Does It Work?

Payday loans are loans that, in a nutshell, are issued with a short term and a high-interest rate. The standard repayment period for a payday loan is the borrower’s next paycheck (hence its title).

There are certain situations where payday loans can be a valuable tool. If you’re in the market for a payday loan, or simply want to know how payday loans work, keep reading. 

What requirements are there for payday loans?

Though the eligibility requirements for payday loans are minimal, it is still possible to get denied. In order to get a payday loan you must: 

  • Have a steady source of income
  • Have an active bank account in your name
  • Have a valid and current government-issued ID
  • Demonstrate proof of address
  • Must be at least 18 years old

How long does it take to get a payday loan?

Payday loans are typically issued very fast, which is why many people turn to them at the last minute. If you start the process with all of the required documents ready, it is possible to have your loan request evaluated in just a few minutes. 

The loan itself is usually given in cash, but it is possible to have the loan directly transferred to your account, or you may even get an exact check for the amount you need.

How much money can you borrow with a payday loan?

It depends on the lender and your income. Many payday lenders will issue loans between $200 and $1000, and are then willing to go up to even higher amounts if you have a positive repayment history with them. However, you must be able to prove with pay stubs that you are capable of paying the loan amount back.

How do payday lenders arrange for payment?

Because a payday loan is a short term loan, many payday lenders require borrowers to give them a post-dated personal check upon receiving the loan. The check will cover all of the loan amount plus any fees associated with the loan. 

Other payday lenders require repayments to be submitted at a specific time the day before the due date, usually online. If the payment is not submitted at the proper time, a late fee is incurred.  

Lastly, other payday lenders will require direct access to your account so they can directly withdrawal the amount you owe. When choosing a payday lender, it’s thus paramount that you choose the lender with the best payment method for you.

What credit score do you need to get a payday loan?

Payday loan lenders often have fewer credit requirements than big banks or other traditional financial institutions. This means you could still get a payday loan if you have low to no credit. Some payday lenders may even offer loans with no credit check.

Can you get a payday loan if you’ve filed for bankruptcy?

Here again, it depends on the lender. Some payday lenders don’t look into your credit history. For the ones that do, however, you may be denied because of this. Some lenders are OK with it so long as it has been at least a year. If you’ve filed Title 11 multiple times, most lenders that check will turn you away.

Do payday loans help your credit score?

In order for any type of loan to help your credit score, the issuer has to submit your payment history to the credit bureaus. Unfortunately, most payday loans don’t do this, which means most borrowers will not see any changes to their credit scores as a result.   

What fees are there with payday loans?

Some payday lenders have a variety of fees and finance charges with their loans. Here are the main ones you should be aware of. 

Initial Finance Charge

When you take out a payday loan, there is usually an initial loan fee, meaning a set amount that’s added to your repayment amount based on the amount you borrow. Most payday loan lenders charge a set dollar amount for every $100 borrowed. This fee hovers between $10 and $30. So if you borrow $400, at a minimum you would have to pay $440, and at maximum, you would have to pay $520.

Late Payment Fee

Fail to repay the loan at the time agreed upon, and you’ll likely be hit with a late payment fee. Make sure you understand when you are supposed to make a payment. Certain lenders, for example, require the payment to be submitted the day before it’s due. Though the payment isn’t processed until the next day, the borrower needs to have submitted the payment the day before, sometimes as early as 2:00 PM. 

Many payday lenders receive a lot of money in fees because the borrowers don’t completely understand the repayment process.  

Extended Repayment Plan Fee

Depending on where you live, you may be able to get a new repayment plan if you are in financial distress. However, there will still likely be a fee associated with this. How high it is will vary on your lender and what state you live in. 

Prepaid Debit Card Fee

If the loan amount is put on a prepaid debit card, there are often fees associated with this method. If you prefer a debit card over cash or direct deposit, make sure there aren’t any fees associated with it.  

Rollover Fees

If you are unable to pay the loan back on the date it’s due, your state may allow rollovers. A rollover is when the lender only charges you the fees associated with your loan, but allows you to put off paying off the initial loan amount. However, when you pay the full loan amount, you will then have to pay the fee once again. 

How do payday loans compare with personal loans?

Personal loan lenders will check your credit history and score, which will drop your score a little bit. However, because personal loans are installment loans, they have longer repayment periods (some even go up to 60 months). Though you may pay more in interest over the life of the loan, the monthly payments are much smaller. Interest rates can range from 6-36%, and the loan amounts can vary from $1,000 to $50,000. The downside to personal loans, though, is that you generally need a decent credit score. If you don’t you’ll pay a lot more in interest. 

How do payday loans compare to title loans?

With title loans, you put up the title to your car to secure the loan. The interest rate is usually on par with payday loans, but the loan amount can be as much as you want up to the value of your car. The risk is greater because if you fail to make payments on time, you could lose your car.

Are there state laws in place for payday loans?

Yes, each state has its own laws in place for payday loans. A good place to see what the state laws are for your state is: https://paydayloaninfo.org/state-information

Another good place is the Consumer Financial Protection Bureau: https://www.consumerfinance.gov/payday-rule/

Typical laws associated with payday loans center around fees and interest rates. Always know what your state allows before you take out a payday loan.

Payday Loans are Meant for Last Minute Solutions 

Payday lending is best used by people with a strong, consistent income and who could easily pay back any fees associated with the loan amount. 

If you don’t qualify for a credit card and need the cash to cover an emergency, a payday loan may be your best bet. Just make sure you know your state’s laws and understand both the fee structure and repayment process.