What are Payday Loans and How Do they Work?

EPF Last Update: May 23, 2020

Things are tight financially, but then the unthinkable happens. It doesn’t have to be anything real big to cause a horrible chain reaction. Maybe your car has a problem, or a family member ends up in the hospital or a major appliance like a washer or dryer stops working. Finances were already stretched too thin and there’s literally no room for anything to go wrong; but it did. Now you are in a huge bind with no money to help bail you out. Where are you going to get an extra $300 to $500 bucks to get you through the bind and back to safety?

There are lots of options out there, and one of them is a payday loan. But are they worth it? What is a payday loan and how does it work?

What is a Payday Loan?

A payday loan is a type of short term loans that offer temporary financial assistance. You may have heard of a payday loan by another term like:

  • Payday advance.
  • Payroll loan.
  • Short term loan.
  • Cash advance.
  • Salary loan.

No matter what you want to call it they basically have the same terms and work the same way. The terms of a payday loan might include things like:

  • Short term unsecured loan.
  • Borrowed amount is paid back with borrower’s next paycheck.
  • Small loans.
  • Payment made all at once plus a finance fee.
  • Possible to lengthen payoff time if needed.
  • Can be done online.
  • Terms vary by state but loans might range from $100 to $1500.

What are The Requirements to Get a Payday Loan?

A payday loan is considered an unsecured loan which means that there is no collateral put up to secure it. The requirements to get a payday or short term loan might include:

  • An open bank account in decent standing.
  • Proof of steady income.
  • Proof of identity.

How Much Does a Payday Loan Cost?

To be totally honest, a payday loan is one of your most expensive options when it comes to getting some extra cash to help out with an emergency or bills. With that being said, it is still a legitimate way to obtain extra funds when you need them. The interest on a payday loan is high, especially if you think about it in terms of APR or annual percentage rates. The actual APR can be a few hundred percent. For instance, you may pay as much as a $20 fee for borrowing $100.00.

How Does a Payday Loan Work?

Getting a payday loan is a relatively easy process and will not take but a few minutes. You will need some documents so that the process is not delayed. When you stop by the payday loan facility you should have your driver’s license, latest paycheck stub and bank account information with you. As long as these are legit they can set up the loan for you. Different facilities have various procedures to follow and states have different regulatory requirements. However, you typically will write a check to the payday loan company for the amount of the loan plus the finance fees. It will be cashed on your next payday. In some cases the agency might just take it out of your account on the date indicated. And if you are not going to have the full amount in your account on the right day you may be able to work it out so that it’s done in multiple payments. This option however will usually cost you more interest.

Advantages of Payday Loans

When you are in a pinch for money and need to get some right away a payday loan might be the perfect solution. You may not even care if there are more advantages to getting payday loans. But there are a few benefits of getting this type of loan. They include things like:

  • They are very easy to apply and qualify for.
  • It’s a fast way to get some extra cash.
  • Payday loans are short term so there is only one payment to pay it off not monthly installments.
  • The amount you can borrow is limited by your income.
  • There are no restrictions on how you can use the money once you get it.
  • They are usually conveniently located and open outside of regular banking hours.

Disadvantages of Payday Loans

Payday loans can be a great resource when you find yourself in a financial bind. They are convenient and quick. But there are also a few disadvantages that you should be aware of such as:

  • Payday loans typically have very high interest payments or fees.
  • Payday loans are only available to someone who is employed on a full time basis.
  • You have to have a current, open and active banking account to get a loan.
  • You are typically only allowed 30 days to repay the loan.
  • If you are not careful, you can end up further in debt.
  • There are some fraudulent loan agencies (be careful who you borrow from).

Are There any Other Alternatives to Payday Loans?

Before you take out a payday loan it’s important to weigh the pros and the cons. Another piece of advice is to consider some of the other alternatives too. Sometimes there are other methods of obtaining extra money that might work out better in the long run. A payday loan is useful, but so are these alternatives:

  • An emergency assistance program can help pay utilities for low income families.
  • A cash advance on a credit card if you have the balance for it.
  • Check out consumer credit counseling for help.
  • Some finance companies offer personal loans.
  • Ask your employer for an advance on your payroll – you may still be behind come payday, but you won’t owe the interest.
  • Borrow some money from family members or friends.
  • Small consumer loans.
  • Credit union loans.

These are all viable options that just like a payday loan can get some usable cash in your hand when it’s needed.

Is a Payday Loan Right for Me?

This is a question that only you can answer realistically because no one else is living in your circumstances. A payday loan is definitely a solution to getting some on-hand cash when you need it. Remember that it is just one option you have available to you. Before you get a payday loan there are a few things you should think about:

  • Check out other options first.
  • Be prepared to pay high rates.
  • The lender will have access to your bank account.
  • These are only short term loans.
  • You’ll be behind when you get your next paycheck.
  • Only borrow what you need and can comfortably pay back.

As long as you know exactly what you are doing a payday loan can help get you out of a bind. Take time to think about it and consider other options. Each person’s situation is unique from all the others and in many instances, a payday loan may be just what you need to get out of a pinch.

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