A payday loan, also referred to as a payroll loan, a salary loan, a payday advance, a short-term or cash advance loan, or a small dollar loan, is basically what it says on the tin. It’s intended to be short-term, it tends to be rather small, and it is unsecured thus you do not need to own a million dollar mansion that possesses 20 lavishly decorated bedrooms all with en-suite facilities and a 200-foot-long outdoor swimming pool in the backyard to avail of a payday loan.
The basic premise of a payday loan is that it relies on the borrower having a current payroll in addition to records of recent employment (typically a minimum of 90-days employment history with the same employer is satisfactory). Without a payroll and without any recent employment records you can bang on the door all you want but you ain’t gettin’ in!
In other words, you may as well kiss goodbye to that much-needed cash flow. You cannot avail of a payday loan without being in current employment and having some form of history to prove that you have maintained employment for a period of time.
Legislation over payday loans varies from country to country and even between different states within the United States.
Usury, or if you prefer plain English – ‘unreasonable and excessive rates of interest’ – is prevented in a number of jurisdictions by setting a limit on the annual percentage rate (APR) that lenders can charge (see below for more on APRs). Other jurisdictions have outlawed these types of loans altogether. And yet other jurisdictions impose very few restrictions, in which case you may lose your shirt before you know it, so do be extra careful in your business dealings.
There is no single body within the United States that oversees or regulates every payday loan business. Instead, it varies from state to state. For example, in Washington State, the Washington State Department of Financial Institutions (DFI) serves as the regulatory body. In Texas, the Office of Consumer Credit Commissioner (OCCC) is the regulator. In New York State, well, in New York State payday loan businesses are illegal so there is, as you’d expect, no governing body.
Generally speaking, you can expect most payday lenders in the United States to offer loans in the range of $100 to $1,000, and the average tends to be around the $300 to $500 mark. Fees set for every $100 borrowed are generally around $15 on the low-end and $30 on the high-end.
Repayment dates are normally set for the borrower’s next work payment date though it’s not uncommon that some lenders will extend this to a period of 45 days. And if you prefer to make repayment installments, that too could be an option, depending on the lender’s terms.
In order to get a payday loan, the process is straightforward:
- Visit the payday loan store with the necessary paperwork, which includes proof of recent employment history, most recent pay stub, government-issued driving license or passport, and a check for the amount you wish to borrow in cash.
- Wait for some form of credit check to be completed (many payday loan issuers do not carry out credit checks so don’t let this scare you – payday loans are still the easiest way for an individual with a poor credit history to obtain a loan).
- Write a post-dated check* for the amount you wish to borrow in addition to the loan fee (initial fees vary but typically for $100 you’d expect to pay between $15 and $30).
- The lender retains the check and will only cash it when you are ready to repay the borrowed amount, which hopefully corresponds to the date you wrote on the check.
- You walk away with your pockets stuffed with greenbacks (the amount you receive is the same amount written on the check minus the initial fee).
Once the loan is due, the loan recipient should come to the lending store in order to pay the loan off. If the recipient does a no-show, the loan company is at liberty to deposit the check into their bank. In cases whereby the loan cannot be repaid in full, the loan may be extended, although that will incur additional fees. Given a scenario whereby the borrower is still unable to pay off the loan plus the amounting fees, the lender is at liberty to threaten criminal prosecution or vouch for check fraud (see Dealing with Delinquents below).
One last word of caution here – if your intention is to use a payday loan to see you through, then be sure to read-up on the fine print before signing the dotted line, and do pay attention to your rights as a consumer for want of falling foul of the law.
Many states in the United States no longer allow post-dated checks to be written. In this case, the borrower will sign a contract which states that the check may be held by the lender until such time that full repayment of the loan can be accomplished – usually within 2 to 4 weeks.
What Does the Typical Payday Loan ‘User’ Look Like?
Long, streaky hair, unshaven, trench coat, jeans, and old sneakers with holes in the soles.
Actually, typical payday loan users come in various shapes and sizes, but two things they do have in common are that they possess a checking account and they have a regular income.
Frequently, a payday user will have no access to credit cards and likely will not have access to a savings account. Because these types of loans often do not require any form of credit check, people with credit problems or no previous credit record will utilize a payday loan. Recent immigrants as well as military personnel may well fit into that category.
Are Bank Payday Loans a Better Alternative to Utilizing a Payday Store?
You may or may not be aware that traditional banks are now very much involved in the payday loan industry. Why so? Simple answer – it’s a good way to achieve extra revenue and we all know that banks are particularly keen to fill their coffers in any way that fits closely to their business model.
There is a potential negative to using a traditional bank in order to get hold of a payday loan. You see, if you have a checking account (with said bank or otherwise) and you agree to allow them to take funds from your checking account in order to repay your payday loan, whenever they want to, they will. They will take money from your checking account as soon as it’s available, irrespective you have to use that very same money to pay for your rent, car, groceries, whatever.
So, with that said, it may be a wise policy to use the services of a different vendor and that way you could have more control over your finances.
On the other hand, however, you may find that a bank offers better terms than the high street payday loan store does, so there are a variety of good and bad apples within the tree from which to pick. Be sure to pick with care!
Any Upside to Payday Loans?
What are the key benefits to using a payday loan?
They serve as a good way to quickly and easily borrow cash during times of emergency and there are no other financial options available to you. As an example, you may decide to utilize a payday lender should you have an immediate financial need which is temporary in nature – perhaps for a medical bill, or for a car expense, or another one-time expense.
Payday loans prove to be a valid option for those who do not have credit cards or savings available to them. And due to the fact that many lenders do not insist on making a credit check, this type of loan is straightforward for folks who have previously suffered with financial problems.
Downside of Payday Loans
It’s most certainly in your interest to repay a payday loan as soon as you can. Unfortunately, for those who are unable to pay the loan off fast, the fees mount up in tandem. It’s a particularly costly affair to be stuck within a payday loan cycle over the long-haul and there’s no escaping the fact that this in itself can lead to ever-mounting financial woes and a whole heap of stress to go with it.
The annual percentage rate (APR) (see below) on a payday loan can reach sky-high levels and it’s not uncommon to see figures of well above 1,000 percent APR being bandied about in this industry. Compare that to a standard credit card where the APR may be 12 to 14 percent or compare to a standard loan where the APR is around 7 to 8 percent and you now see the downside to relying on payday loans to see you through on a frequent basis.
Annual Percentage Rate (APR)
The APR for payday loans in most U.S. states is 547.5 percent on the low-end and rises to as much as 1,000 percent, and in some instances even higher. This rather colossal price range depends not only on the amount of the loan but also on the length of time the borrower wishes to utilize in order to make the full repayment. As you’d likely expect, more sizable loans with longer and pre-arranged payback periods attract lower interest rates.
There’s no escaping the fact that an APR of 1,000 percent sounds like something akin to daylight robbery. Nevertheless, before you get all hot and sweaty under the collar, do keep in mind that this type of loan is merely supposed to be used as a short-term loan, whereby normal repayment terms are around 2 to 4 weeks and no more than that. Again, however, longer repayment terms can generally be negotiated with most lenders.
As by way of comparing the cost of the payday loan to that of other fees charged within the services industry when they are annualized, the payday loan may not be quite the big bad wolf that you might think it to be. If you go over your credit limit or pay off your credit card late, there would be a $37 fee which amounts to an equivalent APR of 965 percent. If you pay for a reconnect from a utility company, typically it will cost you $46 which is the same as an APR of 1,203 percent. And for a check of $100 dollars, a return fee is $32 which equates to an APR of a whopping 2336 percent! Yeah, pretty shocking, right?
Dealing with Delinquents
What does this mean? We’re discussing payday loans, not rogue kids.
Well, with respect to the payday loan, or any loan for that matter, it refers to how a delinquent loan is dealt with. Or, to put that another way, it refers to what happens to you should you not repay in a timely manner. Does a prison cell beckon? Will you be arrested and shipped out of the country on the first boat to leave port, banished from the shores of the United States forever more? Let’s find out now.
Should a payday loan become a delinquent payday loan, the first thing the lender will do is to give you a call. If you choose not to pick up or you’re not available to pick up, the lender will continue to call, and call, and call…
Once you answer the call, providing that you do, the lender will make every effort to come to an agreement with your good self on repayment terms to suit both parties. If you do not agree with the recommendation made, or you simply avoid making any repayment, then the lender is at liberty to ship the loan over to a collection agency.
What action can a collection agency take against you?
Well, one thing is for sure – they are not going to send the heavies around to implement strong arm tactics. You’ll not be threatened by a huge muscle-bound guy who’s tattooed from head to toe and wielding a baseball bat. Nor will you have a shotgun thrust in your left ear.
Instead, it’s a far more graceful procedure than either of these extremely aggressive maneuvers. Well, no, not always, but at least you can be assured that physical violence is not within the arsenal of strategies used by collection agency personnel.
Happy days, right? Actually, no, not really.
When a lender asks for the services of a debt collection agency, the debt may either be assigned (contracted debt) to said agency or it may be sold (purchased debt) to said agency.
When the debt is assigned, the original creditor can ask the debt collection agency to sue you. Moreover, once the agency retrieves some or all of the amount currently outstanding, they make a profit of anything between 25 percent and 60 percent. It’s a lucrative business, so do bear in mind that collection agencies don’t tend to hang about for long. They strike fast and even if you try to hide, they have a variety of ways of tracking you down and making you talk. Sounds ominous, and no doubt about it, it is!
If on the other hand the debt collection agency purchases the debt from the original creditor, they are then at liberty to keep anything and everything they retrieve from you. All the same, sometimes debt that is purchased by a collection agency is dated and thus the information pertaining to the borrower may also be dated. In which case, it can be a tricky job for the agency to assess your current whereabouts. In a sense, you could say that you’ve become a fugitive from the law, or in this case, a fugitive from the debt collection agency – a man, or woman, on the run!
The reality of the matter is that if a debt collection agency figures that you’re an easy catch, they’ll come after you with real intent. If on the other hand they feel the chances of tracking your location is limited, they will give your case a lower priority and you could be off the hook.
Are You a Bad Bet?
Those that issue payday loans have a number of criteria they use to make a decision as to whom they will lend to. They may well utilize information which is available from one of the three largest credit rating agencies: Equifax, TransUnion, or Experian. Thus, if your credit record is on the shoddy side, and your choice of lender is in the habit of relying on statistics available to them from a credit rating agency (most payday lenders do not pursue this line), you might have to search around until you find a business that relies on their own criteria when making a lending decision. Life was never meant to be a simple stroll in the park.
If, on the other hand, the creditor does prefer to rely on their personal methods of assessment (and this is more often the case), the sort of things they’ll want to check are as follows:
- Your current income
- Your capacity to repay (based on your current income minus current outgoings)
- Your previous record with the prospective lender (have you borrowed from them before?)
- Your previous record with other payday lenders
The motto here is that if you are a newbie payday loan borrower and you find that the first lender you approach sends you packing with your tail tucked between your legs, there’s no need to stop there and give up your cause. Instead, set yourself on your merry way and search around for another payday loan company (or get yourself online – see next section). After all, there’s never any harm in asking, is there?
With all that said, the good news is that even if your credit record is either slightly tarnished or totally and utterly hashed up, due to the nature of the payday loan business, there’s still a very good chance you’ll be on the receiving end of a cash advance.
Payday Loans Online
Almost every business in the Western world has some sort of online presence these days, be that in the form of a basic Facebook page, a Twitter account, or a fancy-pants self-hosted website with all the bells and whistles you can possibly imagine. If a business in the West does not have an online presence, the chances are good that the business is leaving money on the table.
If you’d prefer to seek payday loans online rather than traipse around the streets in the pouring rain, then simply perform a web search for ‘payday loan’ and you’ll be greeted with a sizable list of businesses that service this sector.
Typically, in the United States, the requirements to avail of a payday loan online go as follows:
- You’ll need a Social Security Number to prove who you are
- You’ll need a checking account number to receive the deposit
- You’ll need a bank routing number (located at the bottom of a check and appears as a nine-digit number)
- You’ll need a photo ID or government-issued driver’s license
- And you’ll also need some proof of income such as a recent pay stub
Some online lenders will issue cash-available funds into your account via direct deposit within a 24-hour period, while others may take a couple of days to work through the required validation processes and paperwork.
If, when working through the online application form, you’re not entirely sure about something, give the lender a quick call. Most online payday loan businesses have a free-phone number you can call at any time of day or night.
The original sum borrowed together with the fee will be electronically collected from your bank account upon the agreed due-date, which will normally be your next payday unless you extend the loan’s repayment schedule.
And there you have it – the upside, the downside, and everything in between that pertains to the payday loan and how it can either help you or hinder you. Keep in mind that a payday loan or cash advance – call it what you will – is really only suited to those who are in need of fast cash in order to make a one-time payment.
The payday loan is not a viable financial mechanism to utilize over the longer term and there are other methods of realizing cash-flow that are far more attractive than that of the payday loan given this scenario.