While many people have access to credits cards or a personal loan to address their short-term emergency needs, there is a group of people who don’t have such access for a variety of reasons. For these folks, a payday loan might be the only and best available way to raise money in a hurry. The following discussion will be directed towards payday loans and how they work.
What is a Payday Loan?
A payday loan is a short-term unsecured loan option that’s specifically designed to put a small amount of money in the borrower’s hand just long enough to get them to the their next payday. By small amount, that refers to an amount that usually ranges between $100 on the lower end to as much as $500 on the higher end. Note: Maximum loan amounts are often set by state regulations.
The due date of the loan is the borrower’s next payday, be it a weekly, semimonthly or monthly payroll. It is worth noting that some states permit payday loan lenders to seamlessly “rollover” or “renew” a loan with a minimum of effort.
How a Payday Loan Works
Prospective payday loan borrowers usually have have one of two ways to apply for a payday loan. They can walk into a payday loan brick and mortar store and apply for a loan in person, or they can choose to apply through an online payday loan service. One of the great attractions of a payday loan is the application process for said loans is very streamlined, making it possible for a borrower to submit an application and receive an answer within minutes.
As part of the payday loan application process, there are only three pieces of information that most payday loan lenders require. One is solid proof of employment, which is used to confirm the borrower’s payday payment cycle and ability to repay the loan. Another key requirement is ownership of a bank account. Finally, the borrower will have to provide a government ID as proof of age, residence and identification.
Once a loan has been approved, the process continues, though differently for in-store and online payday loans. If the borrowers applies for a payday loan in person, they will usually be required to issue the lender a post-dated check for the full balance, including fees, or provide the necessary banking information for a direct withdrawal of funds on the payment due date. If the borrower chooses the online application route, all transactions are handled through direct deposits and withdrawals.
As indicated above, some states allow lenders to simply rollover the borrower’s loan to the borrower’s next payday. If handled in person, the borrower has to issue a new check to pay for the interest/fees on the original loan and a new post dated check for the amount of the new loan amount plus interest/fees.
The Pros of a Payday Loan
Just using the information provided above, it should be clear what the main advantages are of a payday loan for the borrowers. The list of pros includes:
- Fast and easy loan application process
- Minimal requirements to get approval
- Money in hand out the door in a little as a few minutes
- Ability to secure up to $500 in emergency cash
- Online access to further expedite the entire process
The Cons of a Payday Loan
When something sounds a little too good to be true, it usually is too good to be true. Indeed, payday loans come with some negatives that might make them less suitable as a borrowing alternative for a lot of people. Before going into the negative aspects of a payday loan, it’s important people understand that the payday loan industry is heavily regulated at the state level. This prevents lenders from employing predatory practices.
The biggest concern one should have about pursuing a payday loan is the cost of borrowing. It wasn’t that long ago that an unregulated payday loan industry would slap borrowers with interest/fees that would often reach an APR of as high as 500%. While regulatory changes have brought that number down significantly in recent years, it’s still common to see payday loans carry fees and interest that result in an APR of as high as 300%.
The high cost of borrowing is what creates a secondary issue. If not careful, a borrower could easily fall within the cycle of continuous payday loan borrowing. While churning through the high interest/fees they have to pay, they never seem to be able to position themselves to simply payoff their payday loan and move on.
In summary, a payday loan is a viable way for someone to get fast cash to help with an emergency. However, caution is warranted before making that decision. Under the wrong circumstances, a payday loan could end up putting quite a strain on a borrower’s financial stability.