Payday loans are short-term financial instruments designed to help people manage unexpected expenses. They work like this: A person applies for a small amount, usually $100-$500, and agrees to repay it over one to three weeks. If you qualify, you’ll get the money either electronically via a debit card or wire transfer, or you can pick up a check at an ATM.
Although exceptions exist, most payday lenders don’t make loans for longer than 90 days. And while many people use payday loans to cover emergency expenses such as car repairs, medical bills, or utility payments, others take out payday loans to fund everyday purchases, including groceries, gas, and rent.
Where Do People Get Payday Loans?
Here you will learn where to look for a loan. Small loan companies give out most payday loans. You may find some online or in person. The qualifications for a payday loan are usually that you have a job and a bank account. Some companies may require additional information.
What Are the Costs of a Payday Loan?
Payday lenders offer short-term cash advances for no longer than 30 days. They are designed to help people pay bills and cover unexpected expenses. While some states regulate payday lending, many do not. In some states, lending money without checking credit history is legal.
A two-week payday loan typically costs $15 per $1000 borrowed. For example, if you borrow $1000 for a two-week loan and your lender charges you a $15 fee each time you borrow $100, that is a simple interest rate (APR) of 15%. If you make monthly payments over 12 months, that same 15% APR applies to the total amount owed. However, the APR could be much higher if you take out a shorter-term loan, such as one week.
For example, let’s say that you borrow $1000 for one week, and your lender charges you $15 for every $100 borrowed, which equals an APR of 45%. If you repay the loan in 10 days, that daily interest cost is about $0.85.
How Do I Repay a Payday Loan?
If you have taken out a payday loan and find yourself struggling to repay it, there are a few things you can do. First, try to work out a repayment plan with the lender. This may involve extending the loan for a longer period or making smaller payments over a more extended period. If the lender is unwilling to work with you, you can try negotiating with them. If you cannot repay the loan, you may be able to negotiate with the lender to have the debt forgiven. Whatever your reason, here are five tips to help you repay your payday loan without incurring additional costs.
Be clear about what you want.
Before applying for a payday loan, ensure you understand precisely how much you’ll be borrowing and the repayment schedule. Ask, “What do I need to repay each week?” “Do I need to pay extra for late payments?” and “Can I refinance my loan later?” Lenders typically require borrowers to sign agreements specifying the loan amount, the number of weeks it will run, and whether the borrower needs collateral. Make sure you read the fine print carefully and know what you’re signing up for.
Know your credit score
Your credit history plays a significant role in determining the cost of your loan. Borrowers with poor credit scores are charged higher interest rates and fees. To find your credit score, go online to one of the three major credit bureaus — Experian, Equifax, or TransUnion — and request a free copy of your report. Then compare your score to the national average.
Find out if refinancing is an option.
If your current loan doesn’t fit into your budget, consider refinancing. Many lenders offer lower rates and better terms on existing loans, especially if you’ve been paying on time. Check with your bank or credit union to see if they offer refinancing programs. Or contact a local financial institution to learn about special financing offers.
Requirements to Get a Payday Loan
To get a payday loan, you must:
- Have a steady income
- Have a checking account
- Not be behind on any bills
- Have a valid Social Security card
- Have a driver’s license
- Have proof of income
What Happens If You Can’t Repay Payday Loans?
If you can’t pay off a payday loan by the end of the month, there’s one thing you can do: roll over the debt into another loan, usually extending the term of the original loan. This strategy works because lenders often offer lower rates on loans that aren’t paid off within 30 days.
But rolling over a payday loan isn’t always easy. Some states require borrowers to pay additional fees, such as late fees, to extend the loan. And some states don’t allow rollovers at all. Here’s what happens if you can’t repay a payday loan.
What Do People Use Payday Loans For?
Payday loans are intended to help people deal with unexpected expenses. But according to data from the Consumer Financial Protection Bureau, many borrowers use this type of credit to pay for routine monthly expenses. Seven out of every ten payday loan borrowers may also borrow money to pay for expected bills, such as mortgage payments, car payments, or utility bills. The most common reasons why consumers use payday loans include:
- Routine expenses like gas and groceries.
- Mortgage payment assistance.
- Car payments.
- Medical bills.
- Utility bills.
- Home repairs.
- Child care costs.
- Education costs.