Payday loans: Features, Costs, Credit check, Deposit, Approval

A payday loan, sometimes referred to as a cash advance loan, is a type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The key characteristics of a payday loan include its small loan amount, short repayment term, high-interest rates and fees, and the fact that it’s typically due on the borrower’s next payday.

The costs associated with payday loans can be high, with $15 to $30 in fees per $100 borrowed, penalties for late payment, additional fees for prepaid debit cards, and varying state regulations and extended repayment plans. If a borrower cannot repay on time, there are usually specific repercussions.

Furthermore, there are variations of payday loans such as no-credit-check payday loans online and same-day deposit payday loans in some cases. Instead of conducting a traditional credit check, lenders will typically verify your income, bank account details and identity.

The process of obtaining a payday loan, its size and terms, requirements for application, and factors lenders consider when granting these loans are all essential aspects to understand before opting for this form of credit.

What are the key characteristics of a payday loan?

A payday loan is a specific type of short-term loan designed to bridge the gap between paydays.

  • A payday loan is typically $500 or less. The amount may have limitations on its range depending on state laws, both above and below according to Consumer Financial Protection Bureau (CFPB).
  • Depending on the laws in your state, payday loans can be obtained through storefront payday lenders or online platforms.
  • It is important to note that payday lenders typically do not consider your ability to repay the loan while still meeting your other financial obligations.
  • A payday loan is a short-term borrowing arrangement that is typically repaid in a single payment on the borrower’s next payday or when income is received from another source, such as a pension or Social Security. The due date for repayment is usually set to occur within two to four weeks from the date the loan was made, as specified in the payday loan agreement.
  • Payday loans can often be structured to require a single lump-sum payment for full repayment.
  • In certain cases, state laws may allow lenders to “rollover” or “renew” the loan by extending the due date and having the consumer only pay the fees due.
  • Some payday loans may be structured to be repaid in multiple installments over a longer period of time.
  • To repay the loan, you have two options: you can either write a post-dated check for the full balance, including fees, or provide the lender with authorization to electronically withdraw the funds from your bank, credit union, or prepaid card account.
  • If the loan is not repaid on or before the due date, the lender has the right to cash the check or electronically withdraw money from your account.
  • The loan proceeds can be provided in different manners, such as by receiving cash or a check, electronically depositing the funds into your account, or loading them onto a prepaid debit card.

It is crucial to understand that payday loans are an very expensive form of credit. The exorbitant interest rates associated with payday loans can easily ensnare borrowers in a cycle of debt. If you are considering obtaining a payday loan, it is imperative to meticulously evaluate your financial circumstances and ensure that you can meet the loan repayment obligations promptly.

What are the costs of a payday loan?

A payday loan is a type of short-term borrowing that comes with its own specific set of costs. It’s crucial for borrowers to understand these costs before entering into a payday loan agreement according to Consumer Financial Protection Bureau.

Fees Per $100 Borrowed

Payday loans generally charge a percentage or dollar amount per $100 borrowed. The cost can range from $10 to $30 for every $100 borrowed, depending on state laws and borrowing limits.

A common fee is $15 per $100 borrowed, which equates to an annual percentage rate (APR) of almost 400% for a two-week loan according to Consumer Financial Protection Bureau.

Penalties for Late Payment

If a borrower is unable to pay on time, payday lenders may allow rollovers, where the fees are paid and the due date is extended. However, this results in additional fees. Late fees and returned check fees may also be charged if the loan is not repaid on time according to Consumer Financial Protection Bureau.

Additional Fees for Prepaid debit cards

Prepaid debit cards used for loan funds may come with their own set of additional fees. It’s essential for borrowers to read the loan agreement carefully to understand all associated fees and costs according to Consumer Financial Protection Bureau.

State Regulations and Extended Repayment Plans

Some state laws require payday lenders to offer extended repayment plans without additional costs or fees.

More information on these laws can be found on the websites of state regulators or state attorneys general according to Consumer Financial Protection Bureau.

What happens if I can’t repay on time?

Not being able to repay a payday loan on time can lead to additional charges.

  • Late or Returned Check Fees: If you don’t repay on time, you may be charged a late fee or a returned check fee, further increasing the cost of the loan.
  • Prepaid Debit Card Fees: If your loan funds are loaded onto a prepaid debit card, there could be various fees associated with its use.
  • Extended Repayment Plans: Some states require lenders to offer extended repayment plans to those struggling to repay, potentially without additional costs. However, not all lenders or states offer this option.

Is there anything like a no-credit-check payday loan online?

Yes, no-credit-check payday loans do exist. These types of loans are designed to provide quick cash without the need for a traditional credit check. They are an attractive option for those who may not have a stellar credit history or any credit history at all.

No-credit-check payday loans operate on the principle that your ability to repay the loan is more important than your past credit behavior. Instead of conducting a traditional credit check, these lenders will typically verify your income, bank account details and identity.

It’s important to note that while these loans can be easier to obtain, they often come with higher interest rates due to the perceived risk by the lender. Also, they don’t report your loan application to traditional credit bureaus, which means taking such a loan won’t help improve your credit score.

Is there anything like a payday loan with a same-day deposit?

Yes, there are payday loans that offer a same-day deposit. These loans are also known as instant approval loans. Once the borrower’s application is approved, the loan amount is deposited into the borrower’s account on the same day or by the next business day in some cases.

These types of loans can be a lifeline when facing a financial emergency that requires immediate attention. However, it’s essential to keep in mind that the convenience of same-day deposits often comes with higher interest rates.

Are there payday loans for people with bad credit?

Indeed, there are payday loans specifically designed for people with bad credit. Many payday lenders understand that a poor credit score doesn’t necessarily reflect a borrower’s ability to repay a loan.

Bad credit payday loans are based more on whether you can repay the loan in the short term, rather than what your credit history says. Lenders will often verify your income and employment status rather than conducting a credit check.

While these loans can provide cash in an emergency, they are not a long-term financial solution due to their high interest rates and fees. Borrowers should use them responsibly and consider other options if possible.

Can you get an instant payday loan online?

Yes, you can get an instant payday loan online. Once approved, funds from an instant payday loan can be deposited into your account within one business day, providing quick access to cash when it’s most needed. Many lenders have streamlined their application processes to the point where borrowers can complete an application in minutes and receive approval almost instantly.

However, the speed and convenience of these loans come with a cost—typically higher interest rates and fees. Therefore, they should only be considered in emergency situations and not as a regular financial strategy.

How Do Payday Loans Work?

Payday loans are short-term loans that usually have a term of two to four weeks. The borrower typically writes a post-dated check or gives authorization for automatic withdrawals from their bank account on their next payday.

The loan amount is typically a fraction of their paycheck, usually between $100 and $1000. In return for the loan, the borrower pays a fee, which can range from $15 to $30 for every $100 borrowed. The interest rate on payday loans can be as high as 400% on an annual basis, making them an expensive option for borrowing money.

What Are the Size and Terms of a Payday Loan?

Payday loans come in different sizes, depending on the lender and the borrower’s income. The amount borrowed is typically a percentage of the borrower’s paycheck, and as mentioned earlier, is usually between $100 and $1000. The terms of the loan can vary, but the loan is usually due on the borrower’s next payday.

However, some lenders may allow the borrower to extend the loan term for a fee or to roll over the loan into a new one, thereby adding additional fees and interest.

Requirements for Applying for a Payday Loan

The requirements for applying for a payday loan are typically less stringent than those of traditional loans.

However, borrowers must meet certain criteria to qualify for a payday loan.

  • The borrower must be at least 18 years old,
  • provide proof of income,
  • and have a valid checking account,
  • provide a valid identification.

What Factors Do Lenders Consider for Payday Loans?

Payday loans are short-term loans with high interest rates that are typically repaid on the borrower’s next payday. When deciding whether to approve a payday loan, lenders evaluate several factors:

  • Income: Lenders verify that borrowers have a consistent income to ensure timely repayment. They often review pay stubs or other proof of income.
  • Employment: Lenders confirm that borrowers are employed, reducing the risk of default.
  • Bank account: Borrowers must have an active checking account for depositing the loan amount and withdrawing repayment.
  • Credit history: While payday lenders may not check credit scores, they assess credit history to gauge overall financial status.
  • Debt-to-income ratio: Lenders may consider the borrower’s debt-to-income ratio, measuring debt relative to income. Higher ratios may make repayment more challenging.

Lenders may also weigh additional information such as the borrower’s age, address, and phone number.

Is there any research on payday loans?

Yes, there is extensive research on payday loans. Here are a few notable studies:

  • “Payday loans, uncertainty and discounting: Explaining patterns of borrowing, repayment, and default” – This study incorporates the option to borrow on institutionally realistic payday loans and explores patterns of borrowing, repayment, and default.
  • “Payday loans and consumer financial health” – The research investigates the impact of payday loans on consumers’ financial health. The results were inconclusive, highlighting the need for further research to better understand the payday loan market.
  • “A comparative analysis of payday loan customers” – This research assesses whether payday loan customers are the type of consumers that economic theory suggests are likely to benefit from the use of high-interest loans.
  • “Payday loans and credit cards: New liquidity and credit scoring puzzles?” – This study explores the causes of payday borrowing patterns and compares them to credit card usage. Source
  • “Do payday loans cause bankruptcy?” – This research uses loan records in a regression-discontinuity design to estimate that payday loans increase the risk of bankruptcy.

These studies provide a wealth of information about the nature of payday loans, their impacts on borrowers, and their role in the broader financial market.

Here is some quotes from well cited research:

We find consumers apply for payday loans when they have limited access to mainstream credit.

Bhutta, N., Skiba, P., & Tobacman, J. (2012). Payday Loan Choices and Consequences. Econometric Modeling: Financial Markets Regulation eJournal.

Federal Reserve made a comment on this research in a Discussion Series:

…They find that about 40 percent of payday loan applicants do not have a general purpose credit card and
in total, almost 80 percent of payday loans applicants do not have any credit available on credit
cards. Eliminating or severely restricting access to the payday loan market, therefore, could worsen
well-being for households in distress.

Dobridge, Christine L. (2016). “For Better and for Worse? Effects of Access to High-Cost
Consumer Credit,” Finance and Economics Discussion Series 2016-056. Washington: Board
of Governors of the Federal Reserve System

Millions of US households rely on payday loans and pawnshops for short-term credit, and individuals using payday loans in states where rollovers are allowed are more likely to also use pawnshops together with payday loans, especially for those who make less than $30,000, which highlights the importance of considering these results when deciding whether to allow payday loan rollovers.

Carter, S. (2015). Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan Rollovers. Journal of Consumer Affairs

Empirical analysis confirms two related truths about payday lending. First, there is no denying the large and growing demand for this consumer credit and the rapidly expanding network of companies willing to supply it. Second, despite its expanding customer base and notwithstanding industry denials, the financial performance of the payday loan industry, at least in North Carolina, is significantly enhanced by the successful conversion of more and more occasional users into chronic borrowers.

Stegman, M., & Faris, R. (2003). Payday Lending: A Business Model that Encourages Chronic Borrowing.

We find that payday loans help the subjects to absorb expenditure shocks and therefore survive financially.

Wilson, B., Findlay, D., Meehan, J., Wellford, C., & Schurter, K. (2010). An Experimental Analysis of the Demand for Payday Loans.

Disadvantages with Payday loans

In light of the information gathered, payday loans, while convenient, come with certain disadvantages.

  • High Cost: One of the primary drawbacks of payday loans is their high cost. As per the Consumer Financial Protection Bureau, these loans are usually short-term and for $500 or less but come with high costs.
  • High-Interest Rates: Payday loans have incredibly high-interest rates. Payday loans charge high-interest rates for short-term, immediate credit.
  • Risk of Debt Cycle: Due to the high cost and interest rates, borrowers of payday loans run the risk of falling into a debt cycle. If they are unable to repay the loan by their next paycheck, they might need to take out another payday loan, leading to more fees and a larger debt burden.

What are the legal regulations governing payday loans in USA?

In the United States, payday loans are governed by different laws in each state. But there are some federal laws that all payday lenders must follow.

The Truth in Lending Act (TILA) says that payday lenders have to tell borrowers about things like the interest rate, fees, and how long they have to pay back the loan.

Payday loans are also governed by a number of rules from the Consumer Financial Protection Bureau (CFPB).

These rules include the following:

  • A requirement that lenders evaluate the ability of borrowers to repay the loan prior to making the loan.
  • A prohibition on lenders making more than two withdrawal attempts from a borrower’s bank account.
  • A requirement that lenders provide borrowers with a cooling-off period, during which they can cancel the loan without penalty.

Some states have rules about payday loans that are even stricter. For example, some states have put a limit on the amount of interest that can be charged on payday loans, while others have outlawed them completely.

If you want to get a payday loan, you should look up the laws in your state to find out what your rights are and how they protect you.

What are some common uses for payday loans?

Payday loans are typically used for emergency short-term relief. However, a significant number of people use them to cover routine living expenses. Some of the most common uses for payday loans include:

Car Payments: Payday loans are often used to cover car payments to prevent repossession.

Mortgage or Rent Payments: To avoid eviction or foreclosure, individuals may resort to payday loans to make timely mortgage or rent payments.

Utility Bills: These loans can be used to pay off utility bills to avoid disconnection of services.

Food and Groceries: When cash is tight, payday loans can be used to purchase necessary food and groceries.

How do I apply for a payday loan?

Applying for a payday loan usually involves a simple process. You will typically need to provide personal information, proof of income, and banking details. The lender will then assess your ability to repay the loan.

What types of Payday Loans are available in USA?

In the USA, there are several types of payday loans available, including:

Storefront Payday Loans: These are obtained from a physical location. The borrower provides a post-dated check or authorizes an electronic debit from their checking account.

Online Payday Loans: These are applied for and received electronically. The borrower authorizes an electronic debit for repayment.

Car Title Loans: This type of loan requires the borrower to use their car title as collateral. The lender can take possession of the car if the loan is not repaid.

Payday loans in the rest of the world

The payday loan market is a significant financial sector worldwide. The global payday loans market was valued at $32.48 billion in 2020 and is projected to reach $48.68 billion by 2030 according to Allied Market Research.

The USA has the largest payday lending industry in the world, but payday lenders also operate in 32 other states according to PewTrusts.

In the UK, payday loans are regulated by the Financial Conduct Authority (FCA). Short-term loan direct lenders like MoneyBoat are operating under these regulations.

What are the alternatives to payday loans?

There are several alternatives to payday loans, such as:

  • Personal loans: Banks, credit unions, and online lenders all offer personal loans. Payday loans typically have higher interest rates and shorter repayment terms. To qualify for a personal loan, you may need to have good credit.
  • Payday advance loans (PALs): Some credit unions provide PALs. Payday loans have higher interest rates and shorter repayment terms. To qualify for a PAL, you may need to be a member of a credit union.
  • Cash advance applications: You can borrow a small amount of money against your next paycheck using cash advance apps. Typically, the loan is repaid when you receive your paycheck. However, these apps frequently charge exorbitant fees.
  • Payment Plan with Creditors: In some cases, negotiating a payment plan with your creditors can help you manage your debt without resorting to high-cost loans.
  • Credit card cash advances: You may be able to obtain a cash advance if you have a credit card. Credit card cash advances, on the other hand, typically have high interest rates and fees.
  • Borrow from family or friends: You may be able to borrow money from friends or family members if you are comfortable doing so. However, it is critical to establish clear expectations regarding repayment terms.

If you are thinking about getting a payday loan, you should carefully consider your financial situation and make sure you can afford to repay the loan on time. Payday loans can be an extremely expensive form of credit, and borrowers can easily become trapped in a debt cycle.

Here are some pointers to help you avoid payday loans:

  • Make a budget and keep track of your spending. This will help you identify areas where you can cut back on spending and free up more money to pay off your debts.
  • Create an emergency fund. Having some money set aside can help you cover unexpected expenses and avoid the need for a payday loan.
  • If you do need to borrow money, think about a personal loan from a bank or credit union. Unlike payday loans, these loans typically have lower interest rates and longer repayment terms.

If you are having difficulty repaying your debts, there are several resources available to assist you. You can seek help from a credit counselor or a debt consolidation company.

Things to consider before taking out a Payday loan?

  • Consider the cost of the payday loan, including any fees and interest charges.
  • Evaluate your finances to assess your ability to repay the loan on time.
  • Consider alternatives to payday loans, such as borrowing from family or friends.
  • Research the lender to ensure they are reputable and legitimate.
  • Ensure that the lender will protect your personal information.
  • Check state regulations regarding payday loans and lenders.
  • Know your rights when it comes to late payments and defaults.

See more things to consider for an online payday loan here.

More on payday loans from Borrowly