Payday loans are loans designed to last the borrower until their next payday, usually for less than $500 although some lenders will provide $1000 or $1500.
- The maximum amount a payday lender offers can vary.
- Payday loans are expected to be repaid in line with the borrowers next payday.
- Payday loans are high cost and short term, they are not expected to be a long term fix.
- Payday loans are designed to finance unexpected circumstances.
What Is a Payday Loan?
A payday loan is a type of loan for a small sum of money which is designed to help those who have had unexpected circumstances occur which they have not budgeted for.
The loan is supposed to support the borrower until their next payday when they are expected to pay back the loan in full alongside the fee for borrowing the money.
In order to obtain a payday loan, the borrower will require an income, bank account and valid form of ID. Typically, those borrowing from payday lenders have bad or nonexistent credit scores.
How Do Payday Loans Work?
Payday loans are relatively straightforward ways of borrowing money if you need cash quickly.
The lender in question will confirm you have a valid bank account, ID and source of regular income and then can deposit the funds directly into your bank account within minutes of reviewing your loan application.
The typical price of taking out a payday loan is $15 for every $100 borrowed, however this can vary by both state and lender.
The lender will also require the borrower to give permission for them to automatically withdraw funds from their bank account.
One of the biggest risks of taking out a payday loan is that the borrower will be unable to repay it on the agreed date. If this is the case, the lender will charge a nonsufficient or late fund fee.
There is sometimes also a rollover option allowing the borrower an additional month to repay the loan, however this usually also incurs additional fees. The best option is to repay the loan at the first opportunity to avoid paying excessive amounts of interest.
Payday lenders can offer different amounts of money based on state and applicant income
How Much Can I Borrow with a Payday Loan?
The amount of money which can be borrowed as a payday loan typically varies between $300 and $1000 but can differ from state to state. In addition to this, the amount a lender can borrow can also vary based on their financial situation.
The majority of states which permit payday lending have a cap on the amount which can be borrowed.
Some lenders will take into account how much a borrower earns in order to assess how much they are willing to lend. Other lenders will not do this and leave borrowers at risk of not being able to repay their loan, leaving them with higher interest rates and excessive debt as the loans roll over.
Some states, such as Arkansas, Arizona, New Mexico, North Carolina, Georgia and Washington DC do not permit payday loans at all due to the high risk that borrowers will not be able to repay the amount due.
Should I Take Out a Payday Loan?
Typically, it is advised that a borrower should only take out a payday loan if they are sure they will be able to repay it at the first opportunity, and only if they need emergency funds quickly.
Payday loans are high risk and short term, meaning that they should be used only as a last resort.
Before taking out any form of loan, the borrower should always ensure they are aware of the repayment dates and potential fees alongside the consequences of not repaying the loan within the agreed timeframe, which is usually quite short.
Alternatives to payday loans include title loans, whereby the borrower gives the lender their car title, or borrowing from banks or credit unions.
