People who are struggling to make ends meet know how difficult it is to get through the month without relying on payday advances. Payday advances are short-term loans that allow consumers to access cash quickly when they need it most.
But what exactly is a payday advance, and why must people think about getting one? The following blog post takes an in-depth look at the world of payday advances. It gives borrowers what they need to know about payday advances before applying for one.
Summary
- Payday advances or payday loans are short-term, unsecured loans designed to cover an individual’s immediate financial needs until their next payday.
- They have high-interest rates and fees, making them a potentially expensive way to borrow money.
- The borrower writes a post-dated check or provides the lender with access to their bank account, and the loan is repaid with interest and fees when the borrower’s next paycheck is received.
- Payday advances have been controversial because of their high cost and potential to trap borrowers in a cycle of debt, leading to regulations in certain states to limit their use.
- Payday lenders charge interest rates that are much higher than traditional lenders, with rates that reach several hundred percent annually.
Borrowers must check with lenders to see if they report to credit bureaus and how borrowing impacts their credit score.
Overview Of Payday Advances
Payday advances or payday loans are short-term, unsecured loans designed to cover an individual’s immediate financial needs until their next payday. They are small and have high-interest rates and fees, making them a potentially expensive way to borrow money.
The borrower writes a post-dated check or provides the lender with access to their bank account, and the loan is repaid with interest and fees when the borrower’s next paycheck is received. Payday advances have been controversial because of their high cost and potential to trap borrowers in a cycle of debt, leading to regulations in certain states to limit their use.
Requirements For Securing A Payday Advance
It’s easier to obtain a payday advance than a traditional loan in most cases. Payday lenders have less stringent requirements than traditional lenders, making the process quicker and more accessible for most borrowers. Listed below are the common requirements for payday advances.
- Must be at least 18 years old – It is a standard legal requirement for entering into a contract in most states. Borrowers must be at least 18 years old to legally agree to the terms and conditions of a loan.
- Must have a valid government-issued ID – It is required by most lenders to verify the borrower’s identity and to prevent fraud. A government-issued ID such as a driver’s license or passport is required.
- Must have a steady source of income – Payday lenders require borrowers to have a steady source of income to confirm they are able to repay the loan. They accept income from employment, self-employment, or government benefits. The lender asks for proof of income in the form of pay stubs, bank statements, or other documentation.
- Must have a checking account – Many payday lenders require borrowers to have a checking account to receive the loan funds and to make repayments through automatic withdrawals or post-dated checks. It helps assure the lender gets paid back on time and minimizes the risk of fraud.
Impact Of Payday Loans On Credit Score
Getting a payday advance potentially impacts a borrower’s credit score positively and negatively. Borrowers making all payments on time help build their credit history and improve their credit scores over time. But payday advances result in negative items if the borrower is unable to make payments on time or if they default on the loan.
Late or missed payments show up on a borrower’s credit report and lower their credit score, which makes it harder for them to obtain credit in the future. The lender sells the debt to a collections agency if the borrower defaults on the loan, negatively impacting their credit score.
It is necessary to note that certain payday lenders do not report to credit bureaus at all, which means that borrowing and repaying a payday advance does not impact a borrower’s credit score. Borrowers must check with lenders to see if they report to credit bureaus and how borrowing impacts their credit score.
Speed Of Securing A Payday Advance
One advantage of payday advances is that lenders design them to be a fast and convenient way to access cash when it is needed urgently. The speed of securing a payday advance varies depending on the lender and the borrower’s specific financial situation, but in general, the process is faster than obtaining a traditional loan.
Many payday lenders offer online applications that borrowers are able to complete in just a few minutes, and they receive a decision on their application within hours or even minutes. Funds are available to the approved borrowers within the same or the next business day, depending on the lender and the borrower’s bank. The speed and convenience are particularly beneficial for borrowers who need cash quickly to cover unexpected expenses or emergencies, such as medical bills, car repairs, or utility bills.
Fees Associated With Payday Advances
Payday advances have a variety of fees, which vary depending on the lender and the borrower’s specific financial situation. Here are the common fees associated with payday advances.
- Interest – Payday lenders charge interest rates that are much higher than traditional lenders. The rates vary depending on the lender, but they get high as several hundred percent annually. The interest is usually calculated based on the loan amount and the repayment period’s length. Payday lenders charge $15 to $20 for every $100 borrowed, which results in interest rates from 390 to 780% APR for two-week loans, according to Payday Loan Information for Consumers.
- Finance charges – Payday lenders charge finance charges, which are fees associated with processing the loan. The fees include loan origination fees, application fees, and other charges.
- Late payment fees – Lenders charge a late payment fee if a borrower is unable to make a payment on time. The fee varies depending on the lender, but it is usually a percentage of the outstanding balance of the loan.
- NSF fees – Lenders charge a non-sufficient funds (NSF) fee if a borrower’s bank account does not have enough funds to cover repayment. The fee varies depending on the lender and the bank, but it is usually around $30 to $50 per occurrence.
| Loan Amount | Fee (15%) | Fee (20%) | Total Amount Due (15%) | Total Amount Due (20%) | APR (15%) | APR (20%) |
|---|---|---|---|---|---|---|
| $100 | $15 | $20 | $115 | $120 | 390% | 520% |
| $200 | $30 | $40 | $230 | $240 | 390% | 520% |
| $300 | $45 | $60 | $345 | $360 | 390% | 520% |
| $400 | $60 | $80 | $460 | $480 | 390% | 520% |
| $500 | $75 | $100 | $575 | $600 | 390% | 520% |
The table highlights how payday lenders charge exorbitant interest rates that quickly spiral out of control, leading borrowers into a cycle of debt. It emphasizes the importance of exploring alternative sources of financing to avoid falling into the trap of payday loans.
Where To Look For Payday Advances
Payday advances are available in many locations, including storefront lenders, online lenders, and even banks and credit unions. But obtaining a payday advance from an online lender is a convenient and efficient option for many borrowers.
Online payday lenders offer a quick and easy application process that borrowers are able to complete from the comfort of their homes or office. Borrowers are able to submit their application and supporting documents online and receive a decision on their application within minutes or hours.
How To Pick The Right Payday Lender?
Choosing the right payday lender is a necessary decision that impacts the cost and terms of the loan and the borrower’s overall financial stability. Here are the steps to help pick the right payday lender.
- Research and compare lenders. It is necessary to research and compare different lenders to find one that offers fair and transparent terms, reasonable interest rates, and a good reputation before choosing a payday lender. It involves reading online reviews, checking the lender’s website for information about fees and rates, and looking up the lender’s licensing and regulatory status.
- Check for licensing and regulation. It is best to check if the payday lender is licensed and regulated by the appropriate state or federal authorities. Doing so helps guarantee that the lender follows fair lending practices and complies with applicable laws and regulations.
- Review the terms and conditions of the loan. It is best to carefully review the terms and conditions of the loan, including the interest rate, fees, repayment period, and any other terms or conditions. Borrowers have to make certain they understand the total cost of the loan and afford to repay it on time before agreeing to it.
Issues To Look Out For When Securing A Payday Advance
Payday advances offer quick and easy access to cash, but they have a variety of risks and potential issues that borrowers must know. Listed below are the issues to look out for when securing a payday advance.
- High-interest – rates Payday lenders charge much higher interest rates than traditional lenders, which makes the loan much more expensive over time. Borrowers need to carefully assess the interest rate and the total cost of the loan before agreeing to it.
- Fees and charges – Payday lenders charge a variety of fees and charges, such as loan origination fees, application fees, late payment fees, and non-sufficient funds fees. Borrowers have to carefully review the terms and conditions of the loan to understand all the charges associated with it.
- Risk of default – Lenders offer to roll over the loan or offer another option that leads to extra fees. They pursue collection actions, such as wage garnishment or legal action if the loan is not repaid.
- Impact on credit score – Late payments or defaulting on a payday loan have a negative impact on the borrower’s credit score, which makes it more difficult to obtain credit in the future.
- Predatory lending practices – Certain payday lenders engage in predatory lending practices, such as offering loans with unrealistic repayment terms or targeting vulnerable borrowers. Borrowers must be wary of lenders that make unrealistic promises or pressure them into getting a loan.
Conclusion
Payday advances are short-term loans designed to help borrowers cover immediate financial needs until their next payday. But they have high-interest rates and fees, making them a potentially expensive way to borrow money. Borrowing and repaying a payday advance potentially impact a borrower’s credit score positively or negatively.
Payday lenders design their loans to be a fast and convenient way to access cash when it is needed urgently. But they have a variety of fees, including interest, finance charges, late payment fees, and NSF fees. Borrowers must carefully check their financial situation and if they afford to repay the loan before applying for a payday advance.
