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7 Things to know if you’re getting a payday loan
A payday loan might be your best option if you’re out of other options
We get it. Sometimes money is tight. You might be in a bind, and you need some fast cash. At times like this, payday may seem an awfully long way away. So, if you don’t have other options, you’re probably going to take a look at a payday loan. But how do payday loans work? In the right circumstances, they can be just what you need. But, if you’re going to take one, there are a few things you should know.
How do payday loans work?
1. Fees associated with a payday loan
As with any loan, you’re going to need to pay it back, and your lender will charge you fees. According to the Consumer Financial Protection Bureau (CFPB), most states cap the fees associated with a payday loan at $10-$30 per $100 borrowed.
A two-week payday loan with a $15 fee on $100 borrowed comes out to about a 400% annual percentage rate, which is dozens of times greater than most credit cards! Understanding how payday loans work, especially the fees associated with them, is crucial to deciding whether a payday loan is right for you.
2. Payback requirements/terms
You’ll also want to be aware of the terms and conditions of the loan, such as whether you need to give them a postdated check or your banking information. You can also find out if you need to be present when you pay back the loan.
3. Additional Fees
In addition to the interest you’re going to pay, there may be other fees associated with your payday loan. Some common examples are:
- Late payment fee. If you don’t pay the loan back on time, you’ll get hit with additional late fees.
- Rollover fee. If you roll over your loan, you’ll end up paying extra late fees. According to the CFPB, almost a quarter of payday loans are re-borrowed nine times or more.
- NSF fee from your bank. If your lender is taking money out of your bank account to pay back the loan and you don’t have enough money in your account, you’ll be hit with an overdraft or non-sufficient funds (NSF) fee.
When taking a payday loan it is important to understand how do payday loans work, specifically the total amount you will have to repay for the amount you are getting a loan for, as well as late repayment fees and interest rates. Make sure you choose an option that is realistic and that you know you will be able to pay the loan back by the deadline. However the longer term, the higher the overall cost will be, but the late fees will be even worse — so really try to avoid those! — Kimberly Porter, finance expert, and CEO of Microcredit Summit
4. Your state’s regulation and protections
Just like any other financial product, payday loans are subject to regulation by the state. Many states have restrictions on how much interest lenders may charge and offer protections against wage garnishment or criminal prosecution against you. They also set restrictions on loan amounts and payback periods.
5. Reputation of lender and license
Do some research to see what people are saying about your lender. Read the reviews carefully and see what others are actually saying about the lender. You can check reviews in app stores, and review apps like Yelp also feature reviews of payday lenders. Like in any industry, some payday lenders are going to be better than others.
Payday lenders advise you to read the terms and conditions of your loans carefully and that you should keep in close communication with your lender if you think you might have trouble paying the loan back. If you talk to them, you might have options, but you’ll be making extra trouble for yourself if you ghost them.
6. Customer service
Not all payday lending companies are created equal, and one factor differentiating one from another is customer service. Check out their website to see what features they offer, and read those reviews to see which features customers are talking about.
Payday lenders may offer easy-to-use apps (see below). They may offer special protections for active duty or retired military members. Some payday lenders allow you to apply easily online and you can get the money into your hands in less than 24 hours. Some providers even offer other services, such as business loans, lines of credit, and installment loans.
7. Online/App experience and security
Just like any banking product, you will want to find a provider that offers a good app and online experience. Find a provider with an app and check out its reviews on your device’s app store. Take a few minutes to look over the company’s website, too, to see if it’s easy to use and has the features you’re looking for, such as:
How do payday loans work: Repaying a payday loan
Standard practice for repaying a payday loan is to provide to the lender some form of guarantee that the loan will be paid back. This usually takes the form of either a post-dated check or electronic banking information. When the loan comes due, the lender will cash the check or take the money out of your account. Some lenders require you to come back in person when the money is due, but many don’t.
Let’s say you’re taking out a loan of $300. Your lender charges you $15 per $100 you borrowed, so you are looking at an additional $45, meaning you’re paying back $345 at the end of the loan period (say, two weeks).
Here’s a bit of math to show you how high the interest rate is on a loan like this:
- Divide the fee by the amount of the loan: 45/300=.15
- The multiple by the number of days in a year: .15×365=54.75
- Divide that by the number of days you have to pay back the loan: 54.75/14=3.91
This equates to a 391% APR (annual percentage rate), or about 15-20 times greater than the APR on a typical credit card.
What happens if you’re late?
If you can’t pay the $345 in the example above, then you’ll be hit with a rollover fee. So your loaner will hit you with a $45 charge and now you’re looking to pay back $390 for your initial $300 loan. If you can’t pay back by the end of your rollover period, you’re going to get hit with a late fee.
You can see that if you can’t pay back your loan, your fees will start to snowball. If you have to roll the loan over several times, your fees will add up and surpass the initial loan amount! That’s why it’s important to understand how do payday loans work and if it’s really the best option for you.
Alternatives to payday loans
- Banking with 2-day advance. Many new online-only banking providers, such as Chime, Axos, and Radius, will deposit your paycheck two days early if you sign up for direct deposit. This gives you access to your money faster, and you don’t have to worry about interest.
- Credit union. Many credit unions have started offering alternatives to payday loans. If you belong to a credit union, you can apply for a small loan, known as a Payday Alternative Loan. Check out Consumers Credit Union for rates.
- Personal loans. Companies like LendUp have cropped up as alternatives to payday loans. You can apply for a loan online and find out quickly. They also offer educational services.
- Credit counseling. If you think you would benefit from help with budgeting or improving your credit score, then a credit counselor could be right for you. They can potentially help you get into a situation where you won’t need payday loans at all.
Frequently asked questions about how do payday loans work
1. I can’t repay my payday loan, what do I do?
If you can’t repay your payday loan on time, the first thing you should try is to talk to your lender. You may be able to arrange an extended payment plan. Keep in mind, this may come with additional fees. If that doesn’t work, you can talk to a credit counselor or legal aid attorney if you still need help.
2. How do I stop the payday lender from taking automatic payments?
One common repayment method is to have the lender automatically take money out of your paycheck to repay the loan. But sometimes, you can’t afford these payments, and you need them to stop. In this case, you can revoke something called the ACH authorization, which allows the lender to take the money out. To revoke it, you can talk to the lender to see if you can work out another arrangement. If that doesn’t work, talk to your bank, and they should be able to take care of it.
3. Can I be arrested for defaulting on a payday loan?
No, you can’t be arrested for defaulting on a payday loan. If a lender threatens to have you arrested, you should report them to your state regulator. However, if you do fail to pay back your loan, the lender can sue you. In that case, you’ll be ordered to appear in court. Do not ignore this order. If you do, a judge may issue a warrant for your arrest.
4. Can the payday lender garnish my wages?
A payday lender can only garnish your wages if they have a court order. If you don’t pay off your loan, the lender could bring you to court. If you don’t dispute their claim (or if they win in court), the court will enter an order of judgment against you. Only then can the lender garnish your wages.
5. How do I report an unethical lender?
You can submit a complaint about an unethical payday lender to the Consumer Financial Protection Bureau. Some common topics of complaints are: unexpected fees, payments not being credited to your account, problems contacting the lender, and more.
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