How Does A Payday Loan Work?
Are you looking for an all-encompassing guide to how payday loans work? You’ve found the right place!
A payday loan provides quick funds in a convenient way: when people need money in an emergency, they can simply walk in to a store, call a lender, or apply for a payday loan online. If they meet few requirements and agree to pay back a fee plus the loan amount, they walk out with a check for between $50 and $5,000.
Briefly: The Payday Lending Industry
Payday loans a relatively new phenomenon; payday loan storefronts actually did not exist as recently as the 1990s. But with the economy now slow, and many people living paycheck to paycheck, payday loans offer a convenient alternative to missing a mortgage/bill payment, not having a car or house repair made, or bouncing a check and then paying bank fees.
Payday lending has grown quickly; in the year 2000, $14 billion in loans were written. By 2005 that number had doubled to $28 billion (NYTimes) and in 2010 the industry had grown to write over $40 billion in loans! Payday lenders typically require no credit checks, making them particularly attractive to those with poor or no credit, especially as lending requirements have tightened and banks are requiring more documentation of ability to pay. Payday loans only require information on how to contact the borrower, their bank account and employment information, and contact information for a friend or family member in case of nonpayment.
How Exactly Does A Payday Loan Work?
The loan process itself is straightforward:
- These loans get the name “payday” because you are in essence pledging a portion of your next paycheck, plus fees, to the lender. Payday loans are typically paid back within a certain amount of time, usually two weeks (which is normally within the amount of time before a borrower’s next paycheck).Payday loans are also offered to those who are on fixed incomes, such as social security. Payday loans are similarly called cash advance loans.
- On each payday loan, a lender applies a fixed fee to the loan amount – usually between $10 and $25 per $100 borrowed. So if you were to borrow $1,000 – your fee could be as high as $250 and thus you’d pay back a total of $1250, usually via several payments made over time.
- With most in-store payday loans, the borrower writes out a check for the amount of the loan, plus the fee. Online loans are set up so that your payment(s) are withdrawn from the same bank account that the borrowed funds are deposited into. Some lenders allow payments over time, while others want one bulk payment for the loan amount and fees, as soon as your next paycheck comes in.
- If you can’t pay back your loan before the agreed upon time, you can often “roll over” your loan, which results in rollover fees, and those can add up quickly.
The convenience and low amount of the payday loan fee can be appealing, but quick calculations show that the $10 or $15 to as much as $25 per $100 that is being paid for a two-week period would be the equivalent of over 300+ percent APR, which many in government and the traditional banking system deem predatory.
Applying For A Payday Loan
The application process for payday loans is simple, regardless of whether a borrower applies at one of the 22,000 storefront locations that have sprung up across the country, via telephone, or online.
The most rigorous applications usually require:
- Contact information, including name, address and phone number;
- Email contact information if applying online;
- Social security number;
- Information requested about employment generally includes your name and address of employer, length of time with the company, average gross paycheck amount, and how often the borrower is paid.
- Bank information: simply the borrower’s bank routing number and checking account or savings account number.
Beyond that, paperwork must be signed indicating that you agree to repayment terms and fees for the transaction, which range between $10 per $100 borrowed and $25 per $100 borrowed.
Should You Apply Online Or In-Store?
There are differences to consider between online vs. storefront payday lending operations. Online lenders tend to offer higher maximum loans and the process is immediate and can be done at any hour. The funds are generally wired into the borrower’s account within hours (and if not, within one business day) and are immediately accessible at that point.
The approval process for a payday loan is generally the same regardless of whether done online or in person, as the storefront lender is simply plugging the same information into their computer that the lender does online; access to the storefront is limited to the store’s hours, which makes the online application more convenient for most.
Requirements For A Payday Loan
Eligibility for payday loans varies from lender to lender. Most lenders require that:
- The borrower is at least 18 years of age and either a U.S. citizen or a permanent resident.
- Full time employment is generally a requirement, with some lenders specifying a minimum amount of time that the borrower has worked at their place of employment. If not employed full time, some lenders accept those on fixed incomes, such as Social Security or pensions.
- Payday lenders have varying minimums on monthly income, and some require that the borrower is paid via direct deposit.
- All lenders require valid contact information and active bank accounts, with some specifying that the account must be a checking account, or that the account must be in good standing, or even have been in existence for a certain period of time.
- Many states either do not allow payday loans at all, including Georgia, New York and New Jersey, while others severely restrict the rates that they charge. Others have very loose restrictions; for example, the state of New Mexico does not require lenders to check whether a borrower has already signed for multiple similar loans. Information on the legal status of payday loans for each state can be found here: http://www.paydayloaninfo.org/legal-status.
More Information On Payday Loans
We recently wrote an article on our site on The Truth About Payday Loans, which explains a little more about the risks of payday loans, the “payday loan debt cycle”, and how many borrowers end up getting another payday loan. We hope you’ll give it a read before applying for your loan.
If you are sure you really need a payday loan, check out our writeup on places to get a payday loan within 24 hours.
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Maria Schubert is the editor of Instant-Loans.org. Originally from San Diego, Maria graduated from USC with a Bachelor's in Accounting, Certificate in Banking, and Certificate in Entreprenurship. Before joining our website, Maria spent time as a lender at a prominent Florida bank.
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