If you’re in dire need of cash but payday is nowhere in sight and you’ve run out of options, a payday loan may seem like your only alternative. Such a loan against your future paycheck may get you out of hot water for now, but it’s important to enter the transaction with your eyes wide open to avoid finding yourself in boiling water later.
What Is a Payday Loan?
Also known as a cash advance or a check loan, a payday loan is a short-term loan for a relatively small amount of money—often less than $500. It’s often referred to as a payday loan because the money you borrow is usually due on your next payday. Such loans generally feature an especially high interest rate.
How Payday Loans Work
To obtain a payday loan or a cash advance against a future paycheck, you write a personal check to the lender for the amount you wish to borrow, plus an additional fee. You then receive the amount of your request as cash or as a check, prepaid debit card or electronic deposit. The lender holds your check until your next payday, and then deposits the check as payment for the loan.
Payday Loan Fees
Fees on payday loans can either be a percentage of the face value of the check you’ve written, or charges incurred based on increments borrowed—for instance, a fee of 5 dollars for every 50 dollars you borrow. If you are unable to pay your loan off by the original due date, the loan can usually be rolled over, with additional fees and interest added.
Payday Loan Help: What You Need To Know
- Payday loans are an expensive form of credit. According to the Consumer Financial Protection Bureau, fees for a typical payday loan average 10 to 30 dollars per every 100 dollars borrowed. For an average two-week payday loan you can expect to pay an annual percentage rate of nearly 400 percent. This is a much higher APR than even the most expensive of credit cards charge, which generally top out at 30 percent.
- Payday loan terms tend to be extremely short. Loans are generally set up to correspond with your next paycheck, which means the repayment period is usually one to two weeks in length. Chances are this period is too brief to allow you to solve your cash shortfall.
- Because a week or two often isn’t enough time to resolve cash flow problems, most payday loans are rolled over. Rollovers involve fees that add significantly to the cost of your loan. According to LoanNow, this can lead to an endless, extremely expensive debt cycle.
- You must disclose sensitive account information. The payday loan lender generally requires your checking account information to deposit and withdraw funds. Providing this information leaves you vulnerable to even more financial problems should your information be compromised.
- The Federal Truth in Lending Act, administered by the Federal Trade Commission, regulates payday loans just like any other type of loan. That means that lenders must disclose the true cost of the loan prior to issuing the loan. This includes disclosure — in writing, of the finance charge, annual percentage rate (APR) and the length of the loan.
- Regulations for payday loans vary from state to state, which means fees also vary. Familiarize yourself with the rules in your state BEFORE taking out a loan.
- If you fail to pay off your payday loan, your credit may be negatively affected.
If You MUST Take a Payday Loan
Payday loans should be an absolute last resort for dealing with financial emergencies. Oftentimes, a personal loan from a lender other than a payday lender is your best bet. If you find that a payday loan is truly your only option for raising cash quickly, protect yourself and your finances by keeping a few things in mind. Don’t sign on with the first loan company you find. Compare interest rates/fees and loan terms. Check for online reviews and any complaints regarding the company you are considering. Avoid getting stuck in an endless debt cycle by borrowing the least amount of money possible and paying the loan off on time.