How Does a Payday Loan Work?
- An active account with a bank or credit union, or a prepaid card account
- A job or other verifiable source of income
- A valid ID proving you are at least 18 years old ? ?
You provide your identification, banking, and other details, and once approved, you usually receive your loan funds within 24 hours.
Payday loan companies operate under a wide variety of titles, and each one’s system for loaning and collecting money may be different. But they all make money through upfront loan fees and interest charges on existing loans. Payday lenders may take postdated checks as collateral to deposit on your next payday (or another agreed-upon date).
Payday lenders often offer the option to roll over your loan for an additional fee. So if you pay $30 for a $200 loan and then roll that loan over when it’s due, you’d have an additional $30 fee, meaning you now owe $260. ? ?
Many states have been working on passing regulations to place caps on the allowable interest rates and help out consumers that rely on these loans. ? ?
The Dangers of Payday Loans
Payday loan companies can set up customers to become reliant on them because the loan is due back quickly and the fees rack up. These requirements often make it difficult for a borrower to pay off the loan and still meet regular monthly expenses. Many borrowers have loans at several different businesses, which worsens the situation.
If you rely on the loans, this leaves you with less to spend on what you need each month, and eventually, you may find you’re behind almost an entire paycheck.
Alternatives to Payday Loans
In most cases, it’s best to avoid payday loans at all costs. If you need financial help, investigate other sources first. Some credit unions and banks have begun to offer a similar service of small salary-advance loans but at interest rates much closer to a typical credit card.
It’s worth checking to see if you can get a salary advance through your employer, too. Your boss may be more understanding than you think.
And, even though it’s best to avoid using a credit card, it is still better than taking a payday loan. A credit card gives you more time to pay back the money, with additional flexibility on how you choose to break up the payment. If you can pay the card off in just a few months, you can keep yourself safe from the expensive payday loan cycle. And while cash advances carry high interest rates, even those are less costly than payday loans.
Payday Loan vs. Installment Loan
When you need cash, there are many different options for how you can get it. Payday loans and installment loans are two of the more common types of advances you have probably heard of. The two couldn’t be more different, and installment loans are the much safer option if you have access to them. Here are just a few of the differences:
- Payday loans provide a quick influx of cash, but should be considered last resort options.
- You could pay interest rates that equate to 400% APR or more with payday loans.
- Alternatives include local nonprofits, churches, family members, and personal loans.
- Read more of Personal Finance Insider’s loan coverage here.
Payday loans are advertised as fast and helpful ways to get money to cover an unexpected expense. However, payday lenders can often use predatory practices to get borrowers to accept loan terms that severely damage their long-term financial health.