Everything You Should Know About a Payday Loan

According to the Consumer Financial Protection Bureau (CFPB), a payday loan is a short-term, high-cost loan, often for about $500 or less, generally due on your next payday. At first glance, a payday loan might not seem all that compelling. But for many borrowers, a payday loan can serve various purposes, especially when getting by between paychecks.

To that end, there are some things you need to know if you are in a financial pinch and need funds fast. This article hopes to address your questions about payday loans, telling you what you need to know to make an informed financial decision.

Payday Loans: A Serious Contender When Times Are Tough

Let’s face it, we’ve all had financial ups and downs. Sometimes it's related to job loss. Other times it's related to a new baby in the family, an unexpected auto repair, or a medical expense. And other times, it's because our finances got away from us. Whatever the reason, sometimes we just need access to some extra money to help us make ends meet. And that’s what payday loans are designed to do.

Definition and Purpose of Payday Loans

As we said above, the CFPB defines a payday loan as an emergency-type loan with a low dollar amount and high-interest rate. Most of these loans are designed to be paid back within two weeks or whenever your next paycheck arrives. 

Payday loans are currently available in 37 states across the U.S. These loans can come in quite handy when facing financial hardship, especially if you want to ensure your bills are paid on time. And for many Americans, financial hardships are more prevalent than we might realize. A recent article from Gallup indicates that three in five Americans say recent price increases have caused financial hardship for their household. If that isn’t alarming enough, consider that 15% of U.S. adults say the hardship created by inflation and the state of our economy is severe enough to affect their current standard of living.

While this might demonstrate a need to evaluate your family budget and make some changes, sometimes you need access to emergency cash during the process. This is what payday loans are for.

Features of Payday Loans 

Payday loans are one of the various different types of loans. However, these loans are specifically designed to provide short-term financial assistance, typically to cover unexpected expenses or bridge the gap until your next paycheck. To help you grasp the essential aspects, let's explore the features typically associated with payday loans as outlined by the CFPB and Experian. 

• Short-Term Borrowing—Payday loans are intended for short-term use and are often due on your next payday or within a few weeks of borrowing.
• Small Loan Amounts—Payday loans usually provide smaller loan amounts than traditional loans, typically ranging from $100 to $1,000.
• Quick Application Process—Payday loans generally offer a relatively simple and streamlined application process, allowing you to apply online, over the phone, or in-store.
• Fast Approval and Funding—Payday loans often provide quick approval decisions, with funds typically disbursed within a short time frame, sometimes as soon as the same day.
• No Credit Check Requirement—Some payday lenders may not require a traditional credit check, making them accessible to individuals with less-than-perfect credit. For this reason, payday loans are often considered by those with bad credit.
• High-Interest Rates and Fees—Payday loans often come with higher interest rates and fees than other borrowing forms, so fully understanding the terms and costs involved is crucial.
• Renewal and Rollover Options—Sometimes, payday loans can be extended or rolled over for an additional fee. However, this can lead to increased costs and a cycle of debt if not managed carefully.

How Payday Loans Work

Perhaps one of the most significant benefits of a payday loan is that you can access funds quickly. And sometimes, time is of the essence when you’re in a financial pinch, and you need money while aggressively trying to improve your credit score fast on a parallel path.

Understanding how payday loans work is crucial when considering this short-term borrowing option. Let's delve into the process of obtaining a payday loan, including the application process, approval, and fund disbursement. Here's a step-by-step overview of how payday loans generally operate:

• Application Process—Applying for a payday loan typically involves completing a brief application online, over the phone, or in person at a payday lender's physical location. You'll need to provide personal information, proof of income, and details about your bank account.
• Required Documentation—The lender may require specific documents, such as a valid ID, proof of employment or income, and bank account information. These requirements may vary depending on the lender and local regulations.
• Credit Check Considerations—While some payday lenders may not perform a traditional credit check, they may still review your creditworthiness using alternative data sources. However, your credit score usually plays a minor role in the approval process.
• Loan Approval—After submitting your application and documentation, the lender will assess your eligibility. Factors such as your income, employment status, and ability to repay the loan will be considered. If approved, you will receive a loan offer detailing the loan amount, repayment terms, interest rates, and fees.
• Loan Agreement—If you decide to accept the loan offer, you'll need to review and sign a loan agreement. It's essential to carefully read the terms and conditions, including repayment dates, fees, and the total cost of the loan.
• Fund Disbursement—Once you've signed the loan agreement, the lender will typically disburse the funds to your bank account. The timing of fund availability may vary, but in many cases, it can happen as soon as the same day or the next business day.
• Repayment—Payday loans are typically due in full on your next payday or within a few weeks. The lender may require access to your bank account to withdraw the loan amount plus any applicable fees directly.

Benefits of Payday Loans 

Have you ever found yourself in a situation where you needed immediate cash but couldn't rely on friends or family for assistance? It can be an overwhelming experience. In such challenging moments, a payday loan can provide a solution. And this is precisely where payday loans can offer benefits to some borrowers. 

Payday loans offer a quick and convenient way to access funds promptly, making them ideal for emergencies or when you need extra cash without waiting for your next paycheck. Read on for some of the typical benefits payday loan borrowers can expect.

• Fast and Convenient—Payday loans offer a swift and hassle-free application process, often allowing you to apply online from home. This convenience saves time and eliminates the need for extensive paperwork or in-person visits to a lender.
• Quick Access to Funds—Once approved, payday loans often provide same-day or next-business-day fund disbursement. This rapid access to funds can help address urgent financial needs or unexpected expenses that require immediate attention.
• Flexibility in Use—Payday loans provide flexibility in utilizing borrowed funds. Whether covering medical bills, car repairs, or unforeseen expenses, payday loans allow you to address your financial obligations without restrictions on usage.
• Accessible to All Credit Types—Payday loans are available to individuals with various credit backgrounds, including those with less-than-perfect credit scores. Unlike traditional lenders who heavily rely on credit history, payday loan eligibility is often determined based on income and ability to repay.
• Convenient—Online payday loan lenders offer added convenience through 24/7 accessibility. You can apply for a loan anytime to address financial emergencies promptly, even outside regular business hours.
• Limited Documentation Requirements—Payday loans typically require minimal documentation compared to other types of loans. This simplifies the application process, reducing the burden of providing extensive financial paperwork.

Risks and Considerations 

According to an article by Debt.org, 12 million or more Americans take out payday loans each year and spend $7 billion on loan fees, and interest rates can range from 300% to 500% annual percentage rate (APR). That’s a pretty high-interest rate, especially compared to the typical APR on a credit card of 15% to 30% or a typical loan interest rate of 10% to 25%.

Payday loans may often seem like the only choice, especially when facing financial hardship. If you need help with mastering your expenses, take some time to review your budget and see where your money is going. You should change how much you spend on your wants vs. your needs. And if you do decide that a payday loan is right for you, be aware of the risks, such as the quick repayment requirements and high interest rates. 

Be aware that payday loans are commonly associated with the cycle of debt, which means that you pay off one payday loan simply to take out the next, paying fees all along the way. This can make it hard to get on top of effective money management. For this reason, consider payday loan alternatives before signing on the dotted line.

Alternatives to Payday Loans

When you are in a pinch and are considering a payday loan, consider some alternatives, such as personal loans, borrowing from a credit union, and revising your budget. Exploring credit unions is an excellent starting point when searching for a small loan. These financial institutions have made joining more accessible, and their unique structure, where members serve as owners, allows them to be more flexible with loan qualification standards. 

Local lenders are also a viable option, particularly for businesses, as they offer competitive rates for small loan amounts. Another alternative to consider is credit card cash advances. While the interest rates associated with cash advances are typically in the double digits, they tend to be considerably lower than those offered by payday lenders.

Finally, consider borrowing from a family member or friend that will not charge you interest while you refocus your money management efforts.

FAQ: Answering your Frequently Asked Questions About Payday Loans

We know that you may have questions when deciding if a payday loan is right for you. Here are some common questions that borrowers have.

What is a payday loan?

A payday loan is a short-term, high-interest loan typically due on the borrower's next payday.

What credit score do I need to have to get a payday loan?

Payday loans often do not require a specific credit score, as eligibility is typically based on income and ability to repay.

When do I have to pay back my payday loan?

Payday loans typically need to be paid back within two weeks or when you receive your next paycheck, whichever comes first.

How much can I borrow with a payday loan?

The amount you can borrow will vary from lender to lender. However, most payday loans range between $100 to $1,000.

What happens if I do not pay back my payday loan?

If you fail to repay a payday loan, the lender may transfer your debt to collections, resulting in additional fees. To prevent collection actions, consider communicating with the store manager, financial institution, or online lender's customer service department.

Does a payday loan impact my credit?

Typically, payday loans don't affect your credit scores as they are not usually reported to major credit bureaus unless the loan is not repaid and goes to collections. Storefront payday lenders often base loan eligibility on factors other than traditional credit reports or scores.

Payday Loans Offer Benefits But Are Not the Only Choice for Financial Emergencies

Payday loans offer quick and convenient access to funds, with fast approval and flexible usage options. They are accessible to individuals with various credit backgrounds and can be obtained through online lenders. However, for those seeking higher borrowing limits and more flexible terms, a Cash Store installment loan may be a better solution.

*The content on this page provides general consumer information or tips. It is not financial advice or guidance. Each person’s circumstances are unique. The Cash Store may update this information periodically. This information may also include links or references to third-party resources or content. We do not endorse the third-party or guarantee the accuracy of this third-party information. There may be other resources that also serve your needs.