Also known as a cash advance or check advance loan, the loan until payday allows you to cover your immediate financial needs. Typically, its principal is a portion of your paycheck and is based on the fact that the borrower will pay the cashback on their next payday. That means these low-dollars loans are offered over a month. However, some lenders can extend the loan terms up to 6 months.
How Does a Payday Loan Work?
Usually, a payday loan works in a relatively simple way. The borrower is required to write a check payable to the lender for the amount you want to borrow plus the interest rates. The lender will confirm your checking account and income information and give you the agreed amount of money within minutes or few hours. The lender keeps the check until your loan is due.
To qualify for the payday loan, you’ll need to provide:
- An active bank account
- Proof of a steady source of income such as pay stub
- Some form of ID
- Some lenders might require social security number
Please Note: You might still be rejected for a payday loan even with income and bank account details. For instance, some lenders are legally prohibited from lending to active-duty military, their spouses, and dependents.
How Much Can You Borrow with a Payday Loan?
The amount of money you can borrow varies according to different laws in different states. However, the typical range of payday is between $50 and $1000. Today, 32 states permit payday loans but have put in place caps for the maximum amounts, while others such as Utah, Wisconsin, Maine, and Wyoming don’t have such limits. Montana and California have the lowest cap at $300, while Illinois, Idaho, and Delaware have the highest at $1000. That doesn’t necessarily mean you’ll be approved for this highest amount. The lender might consider your income when deciding how much to give you. States such as New Mexico and Nevada have limited payday loans to below 25 percent of your monthly income to avoid borrowers from overextending themselves financially.
How Much Will it Cost to Take a Payday Loan?
The payday loan costs are stipulated by state regulations with interests of between $10 and $30 for each $100 borrowed. Typically, a payday loan due in two weeks will cost $15 for $100 borrowed. For instance, if you borrow a 14-day payday loan of $100 charged a fee of $ 15, its interest would be 15%. However, since the loan is repaid in 2 weeks, the 15% interest will equal to an APR of 391% for a conventional loan.
Please Note: Ensure that the lender discloses the APR before you accept to take the loan. That’s because some cash advance loans could be carrying an APR of over 1900%.
How Are Payday Loan Repayments made?
Essentially, the loan is repaid through one payment of your following payday. But, since lenders have different terms, ensure that you enquire about the specific due date and form of repayment. Some of the options that lenders accept include:
- A check from your income
- Postdated check when applying
- Bank account debit
- Online via the lender’s website
If you don’t repay your due loan, the lender deposits the check you provided when applying for the loan and gets the money lent and the interest. That means the amount you borrowed will be taken straight from your bank account.
What Is a Rollover Loan?
If you’re unable to repay the loan by the due date, you can ask the lender to roll over the loan. If your State Laws allow it, you simply pay the due fees, and the loan is extended. This gives you time to honor your agreement and refund the borrowed money. However, the loan interests and finance charges will be added to the existing loan.
Are Payday Loans Worth the Risk?
It’s extremely paramount to approach payday loans cautiously. It can solve your short-term money needs, but if you’re unable to repay, it can get you in even bigger trouble. So, if you have to take a payday loan, shop around for the lenders with the lowest interest rates and associated fees. Also, borrow only what you need and make it less than your paycheck. That will enable you to repay and still have enough money left to avoid borrowing again immediately after repaying.
Phoneia.com (July 16, 2021). What Is A Payday Loan And How It Works?. Recovered from https://phoneia.com/en/what-is-a-payday-loan-and-how-it-works/