Payday loans certainly get a bad rap. Some consider them evil or predatory. Is that fair, or is it an oversimplistic view of a credit source with extremely high default rates?
Payday loans are expensive. There is no question about that. The typical payday loan has interest rates ranging from 300% to 800% APR. The real question is not whether payday loans are predatory or evil, but whether they are better than the alternative.
To illustrate, payday loans may be a valid choice if you have no other options, and you need to fix your car to get to work and keep your job. Payday loans are also cheaper than other sources of credit, such as a bank overdraft fee. Banks often charge a $35 overdraft fee for every transaction if you don’t have sufficient funds in your account. On a $20 missed payment, that is the equivalent of a 4,258% APR. Or 852% APR on a $100 overdraft.
That is not to say you should get a payday loan. You should avoid getting a payday loan at all costs. They are an expensive source of credit you should only consider in a real emergency, and only if you don’t qualify for cheaper forms of credit and you can afford to repay it with your next paycheck. Before you even consider a payday loan, consider getting money by other methods, such as selling stuff, getting another job, or borrowing from friends and family.
If you are planning to apply for a payday loan, find out if you qualify for a regular personal loan first. You can see what terms and rates you prequalify for by completing this short survey. You may be surprised by the rates and terms you can get. It will not hurt your credit score and it only takes to minutes to complete. To illustrate, the lenders below will consider applications from borrowers with a poor credit score.
Everything you need to know about payday loans
Every year, more than 12 million Americans spend over $7 billion every year on payday loans at over 20,000 storefronts and hundreds of websites. Needless to say, payday loans are extremely popular. You can see why. Payday loans provide a fast and convenient source of cash, and payday lenders don’t check your credit score. However, their outrageously high interest rates and short repayment terms outweigh their speed and convenience. In most cases, they push borrowers into a cycle of debt that leaves them worse than when they started.
In this guide, we’ll cover:
- How payday loans work.
- The payday loan trap.
- Who is taking out payday loans, and why?
- Where payday loans are legal.
- Payday loan alternatives.
- How to find the best payday loan.
Learn everything you need to know if you are considering this financing option.
How do payday loans work?
Payday loans look like this. Meet John. He is having trouble paying his bills and making the rent on time. So, like millions of Americans, he takes a cash advance on his paycheck. He repays his creditors and makes it through another two weeks. Problem solved? Hardly.
Payday loans are different from other credit sources, such as personal loans, mortgages, or credit cards. You can’t repay payday loans slowly over time. You have to pay them all at once.
What payday loans lack in affordability, they make up in speed and convenience. Payday loans provide instant cash and are available in storefronts, online, and even in some banks. They are also easy to qualify for. Payday lenders only require two things from borrowers: a source of income and a bank account.
So let’s say John is $375 short on his rent, which just so happens to be the average amount for a payday loan. John only has to agree to pay a one-time fee of $55, and the cash is his. If your alternative is not paying your rent, a $55 one-time fee doesn’t sound that bad. However, two weeks later, the payday loan is due, and John’s financial situation hasn’t improved.
That is where the situation takes a turn for the worse.
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.
The payday loan trap
In the worst of cases, payday loans can push borrowers into a cycle of debt that is difficult to escape. In our previous example, there is no way John can afford to pay $375, but he can afford the $55 fee required to renew the loan. If John is a typical payday loan borrower, he will do this repeatedly until he has paid $520 in fees for that initial $375 loan.
Over 80% of payday loans are rolled over or followed by another loan within 14 days. In other words, eight out of 10 payday loan borrowers cannot afford to repay their loans in full and are forced to pay additional fees to renew them.
According to a study by The Pew Charitable Trusts, 12 million Americans use payday loans every year, spending an average of $520 in fees to borrow $375 repeatedly.
Further, the average borrower is in debt for 7 months, which amounts to 14 cycles of payday loans and fees. The one simple loan turns into an ordeal that goes on for more than half of the year.
Who is taking out payday loans, and why?
According to The Pew Charitable Trusts, the following groups have higher odds of taking out payday loans:
- Individuals between the ages of 24 and 49.
- People without four-year degrees.
- Individuals who rent their homes.
- Those who are divorced or separated.
- African Americans.
- Households that earn less than $40,000 per year.
- People who are disabled.
What is driving borrowers to get payday loans?
Seven out of ten borrowers spend the loan proceeds on ordinary, recurring expenses (e.g., rent, mortgage, utility bills, food, or credit card bills). Only 16% borrowed due to an unexpected expense like a car repair or medical emergency.
The truth is, seven out of 10 Americans are strained by financial issues, such as overwhelming debt or not enough income to pay for monthly expenses. According to a Pew report on “The Precarious State of Family Balance Sheets,” the bottom 20% of American households could only replace nine days of income with cash savings.
However, America’s top earners are not doing much better. On average, the top 20% of American households only have enough savings to replace 52 days of income. Statistics like these explain why so many consumers fall prey to fast cash offers, even when the interest rates are so high.
Payday loan regulations by state
Some states are opting out of the payday loan business altogether while others draw lines on what is legal and what is not. According to the National Conference of State Legislatures, the payday lending state statutes as of 2020 are as follows;
Arkansas, Georgia, Washington D.C., New Mexico, and North Carolina prohibit payday loans altogether.
Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Vermont, and West Virginia do not have specific payday lending regulations. However, they do require payday lenders to comply with the interest rate caps set on consumer loans.
37 states have specific statutes that allow payday lending.
Here’s a look at the payday loan statutes by state:
Despite these regulations, payday lenders can still be found in almost all states either online or through unlicensed (i.e., illegal) lenders. In fact, online payday lending has tripled since 2007 and rivals the volume of loans issued by storefronts. You need to know the laws in your state so you can identify if lenders are legitimate.
Are you in need of quick cash but don’t have the credit score to get it? Many wonder if they can even get a personal loan with a 520 credit score or worse.
One might think it’s possible with all the advertisements that promise “bad credit personal loans, guaranteed approval, no credit check” and “direct lenders for bad credit installment loans,” but are they are legit?
Here, we will get to the bottom of these “personal loans- guaranteed instant approval” offers and will reveal our top recommended lenders for those who can’t get approved anywhere else.
Guaranteed personal loan approval for bad credit
If you have bad credit and have been turned down when applying for personal loans, you may have been tempted by ads from lenders that claim to offer “guaranteed personal loan approval for bad credit.”
While no offer is truly 100% guaranteed, many are pretty darn close. The difference between bad credit personal loan lenders and the rest is that bad credit lenders typically require collateral or have exorbitantly high fees and interest rates to cover their risk.
Where can you find these loans?
First, of course, you have payday lenders. They will provide quick cash for people, sometimes without a credit check, as long as the borrowers can prove they have regular income from a job. You often have to show pay stubs to prove regular income and then have to repay the loan plus interest and fees on your next payday. So although they are not completely guaranteed, it’s not hard to qualify.
While you can get near-instant approval with proof of regular income, payday loans should be a very last resort. They are known for being predatory and cause the majority of borrowers to end up in a worse position than when they started.
Auto title lenders
Auto title loans are short-term loans, secured by the clear title of a vehicle. The lender will appraise your vehicle and offer you a loan amount based on a percentage of the car’s value. For example, if your car is worth $2,000, they may cap you at borrowing 50%, or $1,000.
According to the Federal Trade Commission (FTC), lenders often charge 25% interest per month, which equates to a 300% APR, plus fees. The repayment terms can vary from a single payment within 30 days to multiple payments over a few months.
If you miss a payment, the lender can take possession of your car. If you are late and lose the car, you not only lose the car (which is worth far more than the loan amount), you also lose your mobility, which means you now can’t get to work in order to make any money either.
Auto title loans can put your car at risk
These loans are only legal in select states and, in four out of five cases, they are not repaid on time. This leads to 20% of borrowers losing their cars and many others renewing the loan or borrowing from somewhere else. (source)
While anyone with a valid car title can qualify and you are likely to get near-instant approval, auto title loans do come with risks. You may lose your car and can dig yourself into a deeper hole due to the high cost and short repayment period.
The only time this may be worth it is if you need money immediately for an emergency and you have a chunk of money coming within the repayment period that will allow you to cover the costs in addition to your regular living expenses.
Pawnshops are businesses that offer loans in exchange for personal property. They do not run credit checks. You simply bring in the item you would like to use as collateral, and the pawnshop will assess its resale potential.
The shop will decide if they will offer you a loan and, if so, how much the loan will be. You must be 18 and show proof of identity and, in some cases, they may ask for proof of ownership for an item.
Pawnshop loans typically have terms that last one to two months. Costs include interest rates that average 10% per month, along with fees for storage and insurance. If you don’t come back and pay for your item plus interest within the allotted period, the pawnshop will own your item and can sell it.
Anyone 18 years or older can bring an item into a pawn shop, but it’s not quite guaranteed approval because the pawnshop has to agree to offer a loan for your specific item. However, it won’t depend on your credit or financial profile.
While not competitive with unsecured personal loans regarding cost, pawnshop loans are often more affordable than payday or auto title loans. Further, you don’t have to put your car on the line.
Personal loans that almost guarantee instant approval
Now that you know the types of personal loans you can get with bad credit and the risks they present, here are the top lenders in this space.
How to find a guaranteed approval lender
When weeding through auto title and payday lenders, here are the key factors you should consider
Auto title lenders
Look out for the following:
- Loan amount: The minimum and maximum amounts that a lender will extend. Also, note the percentage of your car’s value that a lender offers.
- Vehicle requirements: Most lenders require a clear title and that the vehicle is paid off. However, there may be other requirements.
- Interest: The amount of interest the lender will charge you to borrow the money. It can be helpful to look at it in terms of the annual percentage rate (APR).
- Fees: The amount you will have to pay to borrow the money, in addition to the interest.
- Loan term: The amount of time you have to repay the loan (single payment vs. installment). A major pitfall is choosing a loan with too short of a repayment period.
- Non-payment options: The procedure if you can’t repay the loan, such as how long you have to make the payment before you lose your car, fees that apply, and options for a roll-over.
- Eligibility requirements: What you need to qualify, i.e., full coverage insurance, credit check, proof of address, etc.
- Time to funding: The time it takes to get the money after being approved.
When vetting payday lenders, consider the following.
- Loan amount: The amount you can borrow.
- Loan fees: Individual fees that are charged to borrow the money.
- Interest: The interest rate in terms of annual percentage rate (APR).
- Eligibility requirements: Requirements to get the loan such as minimum income amount, minimum credit score, no bankruptcy, etc.
- Repayment period: The length of time you will have to repay the loan.
- Time to funding: When you will get the money.
While similar to an auto title loan, payday lenders will be focused on your source and amount of income rather than your vehicle, as your paycheck will be the security for the loan. It’s crucial to shop around in order to find the best deal.
The truth about personal loans with guaranteed instant approval
As you can see, there is no such thing as a personal loan with guaranteed instant approval as no lender is going to accept everyone. Even pawn shops, payday lenders, and auto title lenders have minimum requirements and standards.
However, they don’t rely strictly on credit, enabling you to get approved with a car title, an item of value, or a pay stub. If you are considering this type of loan, do so with caution and with a full understanding of the repercussions.
Want to learn how to build your credit and qualify for an unsecured personal loan with better terms? Check out these credit counseling firms that can help!
As you improve your credit, you can easily find out what rates you qualify for without hurting your credit score. Just answer a few simple questions and you’ll receive personalized loan offers from various lenders. Different personal loans come with different rates, fees and requirements, so check out what the best personal loans are to ensure that you choose the best option for you.
What are the best payday loan alternatives?
What other options can you consider when you are strapped for cash but aren’t ready to pay the high APRs?
Reduce your expenses
Analyze your budget to see if there is anywhere you can cut down on your spending. For example, can you get more creative with your meal planning to save on groceries? Can you carpool to cut down gas expenses? Make a list of how you save more and put it into action.
Find a side job
If you keep coming up short on cash, investigate potential side gigs you can pick up in your spare time. Examples include content writing, transcribing, translating, or being a virtual assistant. You may find it surprising how many jobs you can do from home.
Sell unneeded items
Before you decide to borrow, look around your home to see if you have any items of value that you no longer need. If you do, selling them can get you the quick cash you need, and you won’t have to worry about paying anyone back. Facebook Marketplace and Craigslist make it easy to connect with buyers.
Take out a personal loan
Personal loans offer better rates and terms than payday loans. If you don’t think you will get approved, you may be in for a surprise. Many online lenders have cropped up, which cater to the full range of credit scores. You can review a wide range of lenders and apply without hurting your credit score and will get an answer in minutes. To make things easier, we put together a list of best personal loans to help you compare various fees, rates, and reviews.
Apply for a line of credit
Lines of credit offer flexibility and quick access to cash. Rates vary from single-digit APRs to rates that are higher than the average payday.
Get a credit card cash advance
If you have a credit card, you can check to see if it allows cash advances. Most do, and the rates will be lower than payday loans, while the repayment terms will be more flexible.
Borrow from your 401(k)
If you have a 401(k), you likely have the option to borrow against it. Doing so does not require a credit check. Further, loan terms usually go up to five years, and interest rates are competitive. The drawback is you your investments won’t grow until the loan is repaid.
Don’t fall for payday loan scams
If you’ve ever dealt with debt collectors, it is a painful experience. They are persistent and will try to reach you at all hours of the day and night. Due to accelerating fraud being practiced worldwide, there are a growing number of fraudulent collectors preying on people who owe money on payday loans. These perpetrators are even more aggressive than the already overzealous but genuine debt collectors, threatening everything from legal actions against you to having you arrested for non-payment.
In a typical payday loan scam, the victim receives a call demanding payment of an overdue debt. The scammer will often threaten with immediate arrest if she does not pay right away. This is a clear red flag that you are dealing with a scam. However, it often scares people into acting without thinking. Scammers will sometimes make dozens of such threatening phone calls to victims’ homes or workplaces to extract funds. Victims are often accused of perpetrating check fraud, forgery, or money laundering to bully them into paying up immediately.
Some “red flags” of a possible scam loan website include:
- Requests to pay upfront before receiving a loan.
- Payment is requested via wire transfer.
- Payday loan Web sites that lack working phone numbers or mailing addresses.
- The payday lending company is based overseas.
- Loan packages that sound “too good to be true.”
FAQ on payday loans
What is a good payday loan company?
If you have to get an online payday loan, choose one of these lenders.
Do payday loans hurt your credit?
Payday loans generally are not reported to the three major national credit reporting companies, so they are unlikely to impact your credit scores. If you lose a court case related to your payday loan, that information could appear on your credit reports and may lower your credit scores.
How does a payday loan work?
Payday loans are short-term cash loans based on the borrower’s personal check held for future deposit or on electronic access to the borrower’s bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. The average loan term is about two weeks.
What type of credit is a payday loan?
A payday loan is a type of short-term borrowing where a lender will extend high-interest credit based on a borrower’s income and credit profile. A payday loan’s principal is typically a portion of a borrower’s next paycheck.
Can a payday loan take you to court?
A payday lender can only garnish your wages if it has a court order resulting from a lawsuit against you. If you don’t repay your loan, the payday lender or a debt collector generally can sue you to collect.
The bottom line on payday loans
While payday loans may seem like the only option in some scenarios, remember they are not. Alternatives like these can help you get the money you need without such high interest rates. Having said that, payday loans can be much cheaper than losing your job, paying an overdraft fee, or reconnection of an electricity service fee.