Before now, obtaining a payday loan required lots of paperwork. With the advent of technology and the rise of digital bank services, the process and procedure is no longer the same.
A payday loan is a meager loan within the limit of $500 granted to borrowers on a short-term basis at a high cost. The borrower is expected to repay with the next paycheck.
Income and bank account are requirements for obtaining a Payday loan while credit score history is not a barrier. Due to its short-term nature at a high cost, you are advised to trade with caution most importantly when you know you can’t meet up with the stipulated time.
Do yourself well by opting for alternative lending homes.
How do Payday Loan Work?
A payday loan is granted to credit-worthy people.
Borrowers can only assess the loan when the lender confirms their income and as well check their account information after which money can be credited to them within 15-minutes to their preferred mode of receipt either at a store or if the transaction is done online.
Plans to recover the loan are already in place using a signed check by a borrower or permission to electronically withdraw the money from the borrower’s bank account.
This loan is to be repaid after your next payday which could be in two weeks, but in most cases, it can be in a month.
Your failure to call back at the store at the loan due date in case the loan was issued at the store, the lender will be left with no option other than to run the check or make a withdrawal for the loan amount in addition to interest.
While online lenders make use of an electronic withdrawal.
What is a Direct Payday Loan?
Obtaining a loan via payday online most times may have to involve a direct payday lender who may decide the fate of the loan. In essence, it serves as an agent who handles loan processes and makes sales to the highest buyer.
It is risk-taking when dealing with a lender who operates with an agent hence you have little knowledge of the kind of people to handle your financial data.
This process also brings about multiple costs on the overall loan. Therefore, a direct lender is recommended.
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How much does a Payday Loan Cost?
Records with Consumer Financial Protection Bureau show payday lender cost for a loan is usually $15 for every $100 borrowed, for a two-week loan, that’s effectively a 391% APR.
If the borrower failed to repay the loan in full on the first payday, an additional fee is attached and in succession. If the borrower is not conscious of months, the interest amount will end up increasing more than the original loan amount.
Statistics with Pew Charitable Trusts hold that borrowers pay an average of $520 in fees to borrow $375.
Now you can attest to the fact that payday loans are indeed risky and can easily trap one in a cycle of debt if not be careful.
How much can I borrow with a Payday Loan?
Virtually all the states are guided by laws on the amount one can borrow and your finances could also prove another factor.
States that permit payday lending are within the region of $300 to $1,000. For clarification, check your state’s payday lending statutes.
Don’t be carried away by the highest amount approved by the state, your approval can only be determined by a payday lender who will put into consideration your income before deciding how much you can borrow.
In different circumstances, many payday lenders may not look at your capacity to repay, or your other obligations rather will leave you at risk of constantly extending your interest that will doom your person.
Does paying back Payday Loans build Credit?
Your credit score history cannot be built by paying back a payday loan. The reason is, most payday lenders don’t report on-time payments to credit bureaus and as such, it can’t help your credit score.
One obvious thing is that, if you don’t pay the loan back, this act will certainly damage your credit when the payday lender reports you as a (defaulter) to the credit bureaus or may decide to sell the debt to a collections agency that will do so.
What do I need to get a Payday Loan?
To get qualified for a payday loan, there are basic requirements that are required of you which include, an active bank account, an ID, and proof of income such as a pay stub.
Intending borrowers must be at least 18 years old while some lenders may require you to provide a Social Security number.
Upon submission of the listed requirement, bank account, and income, yet your application can stand rejected by some certain category of people. For instance, many lenders who charge APRs over 36% aren’t legally allowed to lend to active-duty military, their spouses, and their dependents.
Basic Requirements for Payday Loans
In line with Consumer Financial Protection Bureau (CFPB), established by the government, to qualify for a loan, most payday lenders only require that borrowers should meet the following:
- Be at least 18 years old;
- Have an active checking account; and
- Provide some proof of income as well as valid identification.
The loan can be approved in as few as 15 minutes. In most circumstances, the borrower writes a check for the loan amount plus a lending fee, and the lender holds onto the check until a predetermined due date.
Most payday loans are extended for just a few weeks. When the loan comes due, the borrower either pays off the loan or allows the lender to cash the post-dated check or otherwise make a withdrawal from the borrower’s account.
What happens if I can’t Repay a Payday Loan?
Late fee is charged on defaults and also an alternative to extend the due date with a fee also attached. When all attempts to recover the loan prove abortive by a lender, such loans are sent to a collection agent for further action.
Payday Loan Alternatives to Consider
Use an interest-free cash advance app.
We have account managers who are on hand to offer you interest-free advances on your paycheck up to two days ahead of time using our mobile apps. Your eligibility to borrow depends on meeting the requirements.
Get a Personal Loan from a Credit Union or Online Lender
A personal loan is more affordable with a lower APR than a payday loan. Alternatively, online lenders may also serve bad-credit borrowers better and can fund loans the next business day, but rates may be higher. You now have a choice.
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Ask if your Bank offers a Small-Dollar Loan
Many banks are beginning to offer small-dollar loans that can help you in terms of emergency expenses. Such banks include U.S. Bank’s Simple Loan and Bank of America’s Balance Assist offer short-term funds for existing customers with a good credit score record.
Payday Loan alternatives to avoid
Long-term, high-interest installment loans: Extension on repayment of loans should not be encouraged considering the huge interest rates it comes with. The rate at which the interest charges are made is indeed disheartening, for instance: A $3,200, two-year loan at 87% APR will end up costing $6,844.
Auto Title Loans
Most of the short-term loans come with disgrace when failed to pay back as agreed. Being backup by laws, they may require you to hand over the title to your vehicle as collateral for the debt. They’re often compared with payday loans, but they can be even worse: If you don’t repay, the lender can seize your car.