for an online payday loan or go in-person through a payday lender at a physical branch, depending on where you live. Upon approval, you receive the payment in the form of cash, check, or through a direct deposit into your bank account.
To complete a payday loan application, you are required to provide paystubs from your employer showing your current income. Your loan principal is typically based on a percentage of your predicted income. At the time of application, the direct lender of the guaranteed payday loan will also do a hard credit pull to check your credit score and credit history, affecting the terms of the loan.
Currently, 32 states have capped maximum loan amounts on payday loans.
Delaware, Idaho, and Illinois have maximum caps at $1,000, giving them the country’s highest max caps.
California and Montana have the lowest payday loans set at $300.
Maine, Utah, Wisconsin, and Wyoming have no maximums on their payday loans. Other states, including New Mexico and Nevada, will limit payday loans to 25 percent of your monthly income.
These loans must be paid back in a single payment due on the payday borrower’s next payday. A borrower can also pay back the loan once they have received income from a pension, Social Security, or another source. Specific due dates are set in original loan agreements, but they are typically set two to four weeks from the initial loan date.
The repayment itself can come in various forms. Payback usually comes in the form of a post-dated check for the full loan amount, including all fees. You can also pay off the loan with:
Generally, payday loans do not have any initial effect on your credit score. Payday loans are not reported to the three major credit reporting agencies in the country, so they will not show up on credit reports. Some lenders may check your credit when they set the loan terms. Hard credit pulls can harm your credit score, but any individual credit check is generally negligible. They otherwise will not show up on your credit report even after accepting the loan.
However, that all changes if you become delinquent on your payday loan. Falling behind or consistently being late on payments result in your lender selling your account to a third-party collection agency. These third-party agencies usually report delinquent accounts as “collection accounts” to the credit reporting agencies. Payment history is one of the most significant factors that influence your credit score, so an account that goes into collections will undoubtedly harm your credit score. This information can stay in your credit file for years and have a lasting effect on your credit.
However, unlike traditional payday loans, Possible Finance reports to credit bureaus with the intent of building up your credit. While this does mean that your credit score may potentially dip if you miss payments, Possible’s terms are designed to help you gradually improve your credit, even if you don’t have credit or have poor credit when you start.
Knowing if a payday loan is right for you and your financial situation often comes down to weighing out the pros and cons.
Probably the most notable advantage to payday loans is that they are relatively easy to access. Going through cash lenders, you can apply for a payday loan and receive the respective funds within just 24 hours. The application process itself can take mere minutes, where traditional loans can take a few days to go through approval. At Possible Finance, you can even apply for a payday loan alternative through an app on your phone.
Traditional loans usually require a lot more in the application process, including a Social Security number, photo ID, proof of income, a credit check, and verification to repay the loan at the end of the term.
Requirements for a payday loan are generally more lenient. To apply for a payday loan, you must be at least 18 years of age and have:
Note that the exact requirements can vary from state to state. Some state laws will have more intense requirements as a means of protecting you. Along with the above, Possible Finance has a few additional requirements for its payday loan alternative. We require that your linked checking account has:
Most payday loans do not require the payday lending party to make a credit check, depending on the state. Other loan types will usually require a hard credit check. As mentioned, too many hard credit checks can affect your credit score. No credit check also means that you do not necessarily need good credit to get approval for a payday loan.
Unlike mortgages, auto loans, and car title loans, payday loans are unsecured, meaning they do not take collateral. This means that, if you do not pay your loan, the lenders cannot seize an agreed-upon piece of personal property as repayment.
That said, most payday lenders still have access to your bank account as an agreed condition of your loan. These lenders also have other means of collecting payment if you default, like enacting lawsuits or selling your account to collection agencies.
One of the most significant drawbacks to payday loans is their extremely high interest, making them drastically more expensive than other types of loans. The typical personal loan will charge interest ranging from 4 to 36 percent, while a credit card typically charges 12 to 30 percent interest. Payday loans charge about 400 percent interest on average, although some states and lenders may charge upwards of 700 percent interest. Possible Finance maintains a lower APR of about 150 percent on most loans.
For example, a two-week payday loan with a fee of $15 per $100 equates to an APR of about 400 percent. For a $500 payday loan, you would be paying an extra $75, for total loan repayment of $575.
Unsurprisingly, it is common for a payday borrower to have trouble paying back their loans because of the information mentioned above. According to the Consumer Financial Protection Bureau, about 20 percent of borrowers default on their payday loans, either on their first loan or after reborrowing. Over 80 percent of payday loans get rolled over or reborrowed within 30 days.
Part of this problem also comes from the application process. Traditional loans involve the lender confirming that you can repay the loan while still meeting necessary, everyday living expenses before loan approval. Payday lenders do not go through this process, which can result in an endless cycle of debt.
Unlike these predatory lenders, Possible Finance checks to make sure that you can safely borrow money without harming your current finances. Our team makes sure that you can repay the loan while still meeting all your necessities and everyday expenses.
Payday loans are suitable for those with low credit because their approval does not depend on your credit score. At the same time, they don’t improve your credit at all. Payday lenders do not report to the major credit bureaus unless you default or go to collections, in which case they will only drive your credit score down.
The terms of most payday loans allow lenders to access your bank account if you do not pay on the due date. Alternately, lenders can have you write a postdated check that they can cash. However, they can cash the check or withdraw money regardless of if you have enough money in your account, leading to an added overdraft fees or insufficient fund fees from your bank. The lender can also charge returned or failed payment fees resulting in even more repayment issues.
This is ultimately your decision to make. Payday loans are useful if you need cash immediately, especially if you have low credit or otherwise have trouble getting approved for other loans. Ostensibly, the risk is low if you can pay them back on time, whether that means already having enough money in your account or knowing you can get enough money in time. However, given the high expenses and the potential for predatory lenders, you need to be extra careful about your decision. It’s important to work with a trusted lender or seek alternatives.
The good news is that you do have a wide range of alternatives to payday loans. Start with a typical personal loan or small consumer loan. If you have less-than-adequate credit, you might be looking at a high-interest rate, but the rate will be significantly lower than 400 percent. Some lenders specifically work with potential borrowers who have bad credit. Personal loans can take more time for approval, and the requirements can vary based on the lender.
If you are a member of a federal credit union, you may be able to apply for a payday alternative loan (PAL). These are nearly identical to payday loans. However, the interest rate is considerably lower, with a maximum APR of 28 percent. The repayment period also occurs over a much longer period of one to 12 months. However, these are not offered by every credit union.
Possible Finance also offers a unique payday loan alternative that offers fairer terms designed to help you build credit over a more extended repayment period. To learn more about payday loans along with Payday Loan Debt Assistance, visit Possible Finance.
Chang is an avid writer, among other things, at Possible. He grew up loving reading and writing, creating his own poems and even a book he's now hidden in an old closet, unpublished. His financial experience at a large bank along with his passion for technology to help underserved communities inspires him to write for Possible.