Payday Loans: How They Work, What They Cost

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A payday loan offers money quickly for people who have an income, but bad credit. Payday loans are usually small, less than $ 500.

But payday loans are the most expensive way to borrow money. If the loan is not fully repaid on the first pay day, a new financial charge is added and the cycle is repeated. In a few months, borrowers may end up paying more interest than the original loan amount.

Because short-term loans are subject to a mosaic of state and federal laws, these loans look different in almost every state. They can go by names such as cash advance, deferred deposit, deferred presentation or credit access business.

How do payday loans work?

How much can I borrow through a payday loan?

What do I need to get a payday loan?

How much does a payday loan cost?

How does a payday loan affect my credit?

What are my alternatives for fast money?

Payday loan alternatives to avoid

The payday loan is very controversial and is effectively banned in 18 states. It has been the subject of increasing scrutiny by federal regulators, who decry the practice as misleading and prejudicial to consumers.

Payday lenders say their business is giving millions of hard-working Americans access to the money they desperately need in an emergency. Consumer advocates point out that payday lenders really only benefit when borrowers can not repay their loans on time, which motivates lenders to increase credit too much, plunging borrowers into a spiral of growing and dangerous debt.

For this reason, financial experts warn people to avoid payday loans, especially if there is a chance they can not pay back the loan immediately, and look for one of the many sources of loan alternatives available instead.

How do payday loans work?

A payday lender will confirm your income and verify your account information and deliver money in as little as 15 minutes in a store or the next morning with an electronic transfer if the transaction is done online.

In exchange, the lender will ask for a signed check or authorization to withdraw money electronically from your bank account. The loan is due immediately after your next payday, usually in two weeks, but sometimes in a month.

If the loan is issued in a store, the lender will make an appointment for you to return when the loan is due and call a day or two in advance. If you do not show up, the lender will make the check or withdrawal for the loan amount plus interest. Online lenders will initiate an electronic withdrawal.

Online payday loans can go through a direct lender, who makes his own decisions on loans, and brokers, who simply sell your information to the highest bidder. If you feel that you need to take out a payday loan, go through a direct lender.

How much can I borrow through a payday loan?

Thirty-two states allow payday loans. All but four – Maine, Utah, Wisconsin and Wyoming – capped the maximum amount of the loan.

The highest limit is $ 1,000 in Delaware, Idaho and Illinois; the lowest ceiling is $ 300 in California and Montana. The most common cap is $ 500. Some states also limit each payday loan to no more than 25% of a borrower’s gross monthly income, whichever is less. Nevada and New Mexico capped each loan at 25% of the gross monthly income of the borrower rather than a fixed amount. Details on state boundaries can be found here.

This does not mean that you will be approved for the highest amount allowed by law. A lender will consider your income, expenses, and payday loan history to determine how much you can reasonably repay.

The industry has calculated that the average payday loan is $ 350 to pay back in two weeks.

What do I need to get a payday loan?

To qualify for a payday loan, you usually need to have an active bank account, a piece of identification and proof of income, such as a pay stub. You must be at least 18 years old.

You do not need a good credit to get a payday loan.

Lenders check with a specialized consumer assessment agency to make sure you have no payday loans outstanding, a wage garnishment or other judgment against you, or a history of bad checks or bankruptcy.

You may be denied for a payday loan, despite having an income and a bank account, for several reasons. They can include:

You do not make enough money. Some lenders need a monthly net income of only $ 500; some require more.

You do not meet their repayment conditions. States may have specific laws limiting the amount of your income that you can spend, and each lender may have its own algorithm to assess the risk that you will not pay back.

You already have a loan in progress. Lenders subscribe to a business that can track loans in real time.

You are active-duty military. Federal law prevents payday lenders from making short-term loans to more than 36% APR to the military. Some lenders find ways to circumvent the limits of the law, but others exclude them as clients.

You have a recent bankruptcy.

You have recent bad checks.

You have not been employed long enough.

Your bank account has been opened too recently.

How much does a payday loan cost?

The cost of getting a loan varies depending on the state and the lender. States that authorize payday loans generally cap the maximum allowable interest between $ 10 and $ 30 per $ 100 borrowed.

The cost of a loan from a showcase payday lender is usually $ 15 for every $ 100 borrowed, according to a study by the Federal Bureau of Consumer Financial Protection. At this rate, a loan of $ 350 – the amount of the middle window loan – costs $ 52.50. When it’s time to pay back, usually in two weeks, the total amount owed is $ 402.50.

Online payday lenders tend to charge higher rates and often request an exemption from state rate caps. The CFPB found that the median cost of the online payday loan was $ 23.53 per $ 100 borrowed.

However, most loans are extended. Nineteen of the states that allow payday loans allow lenders to refinance a loan, in which case the borrower pays only the interest charges and extends the loan for two weeks. He then receives a new commission of interest. Other states do not prohibit a borrower from taking out loans, which has the same effect.

Most consumer loans are clearly labeled by the annual rate, which includes the total cost of fees and interest over a year. This cost of $ 15 per $ 100 for a two-week loan is 391%.

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