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How Payday Loans Work
4 Jun 2018

Your Guide to How Payday Loans Work

Do you find yourself in a sudden financial emergency but you can’t pay it off because your payday is still a week away?

You should consider getting a payday loan.

If you’ve never taken one before, payday loans might sound like an alien concept. Few banks offer these types of loans but this is changing. People are urging banks to offer payday loans because there is a need for low-cost financial options.

This is unfortunate because payday loans can be a great help for those instances where you need a quick financial fix. To help you decide whether this is the right type of loan for you, here’s an in-depth guide explaining how they work:

How Payday Loans Work

A payday loan is, in its most basic form, a type of short-term loan. Here’s how payday loans work: you borrow a small amount of cash and then pay it off within a few days or weeks. You have to pay these loans by your next salary, hence the name.

You don’t submit an application and wait as they run a credit check on you. Instead, you often have to submit a post-dated check they can cash in on the maturity date of the loan. If it’s an online payday loan application, there are similar conditions to fulfill, like promising to pay on the due date.

Unlike regular loans, you don’t apply for these at the bank. You have to approach a payday loan business, which often offers other financial services like foreign exchange or bad credit loans. Some banks do offer payday loans but it’s more of an exception than the rule.

Also, payday loans don’t take too long to apply for. You can submit an application and get a response within 24 to 48 hours. You’ll then get the money, the terms of paying the loan, and the date when you have to fulfill the loan.

Different Kinds of Payday Loans

Not all payday loans are the same. The basic payday loan requires you to either submit a post-dated check, let them charge your credit card on the due date, or sign a paper confirming you promise to pay the loan on the set date.

A same-day loan is a payday loan that you can cash out on the day you applied for it, hence its name. There are also medical emergency loans and utility loans, which are payday loans meant only for paying specific bills. You don’t get the cash from those loans; the hospital or utility office collecting your payment gets the cash instead.

Then there are title loans. These are, in many ways, similar to payday loans since they don’t look into your credit score but they don’t ask you to pay on your next salary. Instead, they use your car title as collateral.

This means they’ll take your car if you can’t pay the loan.

Requirements for a Payday Loan

One of the first things people ask about payday loans is the list of requirements. Most people worry about the requirements if they have bad credit. To date, 40% of people experience difficulty applying for loans and credit cards because of a credit score.

The good thing is that payday loans almost never require good credit. This is because your credit standing has no effect on the viability of the loan. Payday lenders simply want proof you have a regular income and can pay the loan by your next salary.

Because of this system, which is more practical for short-term loans, the only requirements include:

  • Proof of identification
  • Proof of income
  • Contact information

If you’re applying for a payday loan locally, at a physical business corner, you may have to write a check. The lender will cash the check on the date your payment is due.

Why These Requirements?

Why do payday loan businesses ask for these requirements instead of your credit history or your credit report?

Consider the time it takes to apply and pay for these loans. Most payday loans only last for 2 weeks and then they’re paid off.

Looking into a person’s credit history won’t matter because the lender isn’t depending on monthly interest payments to earn a profit. Since it’s a short loan and the borrower is, supposedly, going to pay everything in one go, the lender has to determine if the client can indeed make the payment on time.

It’s only a few days or weeks and the only means of securing money that fast is if the borrower has a regular source of income.

Keep in mind that this doesn’t negate credit checks entirely. Some lenders will still run a soft check to get a better look at your financial standing.

Contact information is also required. This ensures the lender that they can get their money back if the post-dated check bounces or if the borrower doesn’t pay online on time.

Keep in mind that most payday lenders don’t require any form of collateral. Some do, however, and these can range from your credit card, to your phone, or even your car title.

Do Payday Advance Loans Look into Your Credit?

As stated, most payday loans don’t access your credit history or banking information. They’ll only do a soft inspection regarding previous loans or if you’ve taken other loans throughout the year. All they care about is if you have the ability to pay the loan.

This means they’ll only conduct a soft check on your credit score or credit report. You could have a credit score below 620 and still potentially qualify for a payday loan as long as you can prove you have wages coming in soon to pay off the debt.

This helps explain the popularity of payday loans. In 2016, more than 10 million Americans wanted to take a payday loan. Not all of them had bad credit, mind you, but they relied on payday loans to pay off bills or other necessities because their salaries weren’t coming in until a few days later.

When You Can’t Pay the Loan

How does a payday loan work when you can’t pay on time? What are the penalties?

Regular banks charge an Annual Percentage Rate (APR) when you take a loan, which is the total interest added on top of your borrowed balance. For bank loans, the APR tends to range between 12% and 36%.

Payday loans are different. Say, for example, you borrowed $100 to pay a bill and the lender charged you $15 for it and stated you have to pay on your next salary, which is in 14 days. $15 doesn’t sound like much at this scale but the details hide in plain sight:

If you divide $15 by 14 days, you’ll discover you’re paying $1.07 per day. If this loan carried on for a whole year then this means you’ll pay a fee of $391 on top of the $100 you owe.

That’s a 391% APR slammed on top of your loan.

This is the system that helps payday lenders profit. Many borrowers allow their loans to roll-over, meaning they don’t pay it on the due date and allow more fees to charge on top of it.

However, if you know, without a doubt, that you can pay the loan on the due date then you won’t end up paying such high fees. It’s a risk-vs-reward system you’ll have to carefully consider before applying for a loan.

How to Pay Payday Loans

Not paying these loans is a bad idea, as shown above. The interest rates skyrocket before your eyes and you’ll end up paying more than you borrowed. It could lead you to more financial trouble.

This means paying your loan is the top priority. How can you pay these loans? Most payday lenders offer several options:

Post-Dated Checks

Small lending businesses, which focus on local customers, tend to accept post-dated checks. Many of them require you to submit one along with your application form. This means you don’t have to go there on the due date to pay since they can simply cash-in the check you gave them.

This does pose a risk for the lender. What if your bank account is empty on that day? The check will bounce and they won’t get their payment.

If this occurs, they’ll try to contact you and ask for the payment. If you still can’t pay or if they can’t contact you, the lender will then roll the loan over and impose the high APR fees.

Credit Charges

In today’s online world, the most common way of paying payday loans involve credit charges. Most of the time, these charges are automatic. As long as there’s cash in your checking account or available balance on your credit card, you’ll be able to pay the loan automatically.

Like post-dated checks, lenders will try to get a hold of you if they don’t see the payment pop up on through their online system.

Manual Payment

The final option is to pay your payday loan manually. This means going to the payday lender’s physical shop and pay with cold cash. Not many payday lenders offer this nowadays since most of these businesses now function entirely online.

Pros and Cons of Payday Loans

Are payday loans the answer to your sudden financial problems?

To help you weigh your choice, here is a look at the different pros and cons of getting a payday loan:

Pros

One of the biggest advantages is that payday loan applications don’t take long. You can expect a response within a few hours. Some lenders reply as soon as they confirm you have a regular salary.

Another good aspect is that you have a higher chance of approval, regardless of your credit score. As long as you have a regular income, the lender may approve your loan. This makes payday loans the optimal choice for people with bad credit.

Most payday loans are small, ranging from $100 to $500 at times. Only returning borrowers get to apply for a bigger loan. This ensures you don’t borrow more than you can handle.

If you can’t pay the loan on time, you’ll only suffer a higher APR rate on top of the current fees. These penalties won’t affect your credit score. This again counts as a plus for people with poor credit.

Cons

Like any financial move, there are a few downsides to a payday loan.

One of the problems of payday loans is their high APR. The rate can go as high as 1000% in some places. This system forces people to pay as early as possible but it also pushes those who can’t into a corner.

People who can’t pay the loan in time end up with higher fees than intended. If they can’t get another loan to pay off the first one, it’ll snowball until their fees rise up to insurmountable amounts.

Is a Payday Loan Right For You?

Considering the different pros and cons of a payday loan, you have to stop and ask if this is the right solution to your financial needs.

If you have a bill to pay tomorrow but your salary doesn’t come until the weekend, then a payday loan could be the answer. You can look it like getting a salary advance but with a small fee attached to it.

If you’re only getting the loan to buy something you don’t need or to pay off another set of loans, then this might not be the solution you’re looking for. It is a better solution to see financial aid than to pay off a debt by getting into another one.

Get a Payday Loan Today

Knowing how payday loans work guarantees you won’t get one for the wrong reasons. These are helpful solutions for people who need quick cash but also understand they need to pay the debt quickly before it grows into a bigger financial hole.

But don’t think this is your only solution.

If you need other types of loans or if you worry you can’t get a big loan due to bad credit, don’t hesitate to visit us today. Our tools can help you find the right lender and loan offers that cater to your needs.