Technically, there's no set structure or terms for payday loans. These loans are typically expensive, short-term loans of $100 to $1000. However, loan amounts, fees, and rates vary significantly based on state law.For example, in Illinois, payday loan amounts are capped by state law at $1000 or some percentage of your monthly income. Whereas, in Indiana, payday loan amounts are capped at $500. Finally, in some states, like Georgia, North Carolina, and others, payday loans are prohibited.The average paydayloan amount is small—only $375. The average payday loan annual percentage rate (APR), though, is an extremely high 391 percent. Since payday loans are so expensive, it's best to use an alternative—such as a credit card—to cover short-term cash shortfalls.If you do choose to take out a payday loan, it's important to know what you're getting into. To that end, this post will cover how to qualify and apply for a payday loan as well as its pros and cons.
How do Payday Loans Work
As mentioned, there’s no standardized payday loan. Still, most payday loans work fairly similarly. You’ll usually repay your loan in a single payment on your next payday. So the due date of your loan is generally two to four weeks from the date the loan was made. To ensure loan repayment, payday lenders generally require you to write a post-dated check. The check must cover the full amount of the loan, including fees. Alternatively, you may need to authorize the lender to debit the funds from your credit union, prepaid card account or bank. This enables the lender to collect from you if you don’t pay on time.
How to Qualify for a Payday Loan
Relative to other financing options, payday loans are one of the easiest loans to qualify for. According to theConsumer Financial Protection Bureau (CFPB), payday lenders generally require that you have:
An active bank, credit union, or prepaid card account
Proof or verification of income
Valid identification
In addition to the above requirements, you must be at least 18 years old to qualify for a payday loan. If you don’t have a job but receive a pension or Social Security benefits, you can still qualify for a payday loan. The difference will be that your loan due date will be whenever you receive your next pension or Social Security payment.
The Pros and Cons of Payday Loans
Pros of Payday Loans
1. Get access to cash fast
The application process for payday loans takes minutes. Then, as soon as your application is approved, the loan proceeds are deposited into your bank account. So from application and approval to funding, payday loans provide cash very fast to cover emergency expenses.
2. Easy qualification criteria
As you can see from our section on qualifying for a payday loan, it's easy to get approved. As long as you're at least 18 years old and have a job, driver's license, and a bank account, you can get a payday loan.
3. Repayment can be delayed
Although it can be very costly, in some cases you can rollover or renew a payday loan. When you roll over a payday loan, you pay a fee and the lender lets you delay paying back the loan. That said, in some states, renewals and rollovers are banned or limited by state law. Keep in mind that rolling over or renewing your loan doesn’t reduce what you owe. All it does is allow you to delay payment.
Cons of Payday Loans
1. Very expensive interest rate and fees
According to the CFPB, payday loans charge $10 to $30 for every $100 borrowed. On the low end, at $15 for every $100 borrowed, this equates to an APR of 400 percent. For context, the average APR of a travel credit card is between 15.16 and 22.78 percent. Put another way, given a $15 fee, on a payday loan of $400, you’d have to pay back $460. Alternatively, if you carried a $400 balance on your credit card for one month, at a 20 percent APR, you’d have to pay back $406.
2. Lenders gain access to your bank account
Whether the payday lender requires a post-dated check or access to your bank account, they’ll have access to your bank account. If the lender tries to withdraw money from your account, you could face overdraft fees. Not only that, your inability to pay can hurt your credit score.
3. No benefit to your credit score
Unlike other types of lenders, payday lenders don’t usually report to credit bureaus. They typically only report to credit bureaus if your loan gets sent to collections. This means that payday loans may actively work against you building a positive credit history.
Conclusion: Applying for a Payday Loan
You can apply for a payday loan in-person at a storefront payday lender or online. In either case, the application will be very similar. The only material difference is that you’ll have to visit a storefront payday lender in-person. If you are considering a payday loan, make sure you’ve educated yourself about them. Payday loans are notorious for starting a vicious debt cycle. Plus, unless you’re in truly dire straits, there are likely more affordable alternatives. If you do decide to apply, read the details of your loan agreement carefully.