Read the first few paragraphs to know in simple language how payday loans work. Then we do a detailed study.
What are your options when you need some cash (not more than 500 dollars) in an emergency?
Can you go to a bank? No. Can you ask a financial institution? No. Yes, you can ask your parents and/or friends. But what if you don’t want to? From where do you get cash? From a payday lender if no other option is available.
To apply for this loan you have three options – 1. Apply in a shop, 2. Apply online, and 3. Apply by phone.
1. How payday loans work when you apply in a shop:
You walk in the shop. You fill an application. You have to give copy of some or all of the documents like bank account, last pay stub, Social Security, Driving license etc. You then sign a check for the loan amount plus the fee. Your check is dated on the day your pay falls in your account so that lenders do not deposit it before your payday. You give this check to the lender. The lender gives you current dated check equal to the loan borrowed. You deposit the check in your bank. You can even get this amount deposited in your account electronically, and pay the lender electronically. Here the process is slightly different. You don’t sign the check, but you sign a auto-debit form to withdraw cash from your account automatically on the pay day. Once you payback the loan is considered closed.
2. How payday loans work when you apply online:
You search for payday lenders online in a search engine. You finalize a website and open its online application. You fill in the details. The lender will call you. Depending on your situation and state of residence lenders will ask for copy of some documents. In some cases they may not. They send you an agreement online. You sign the agreement online. (Online signatures are legal as well.) You should have noted that while applying online you actually filled up your personal, bank and employment details and an online debit form. Lenders deposit cash in your account electronically. They debit cash on your payday electronically too. If everything is fine, loan is considered closed.
3. How payday loans work when you apply on the phone:
You see a toll-free phone number of a lender online, or in some magazine or anywhere else. You call that number. A call-center employee takes the call. They ask for some details. These are the same details that are asked in an online application. They email you a loan agreement. You need to sign that agreement and send a copy back to them. If they asked for some proof, you may need to fax that too. You have to sign the auto-debit authorization form. Once everything done, money is credited in your account. And the same way its auto-debited from your account on your payday. If everything is fine, loan is considered closed.
Note: In all three cases above, cash is deposited in your account within 24 hours from the time the loan is approved and accepted/signed by you. If next day is a holiday, it will take 48 hours. For example applications approved and accepted on Saturday till 7pm will have cash deposited on Monday.
Some lenders will ask you to FAX certain documents like your pay-stub etc. Sometimes its 100% online. Traditional credit check is not done. But lenders have their own systems to check your credit. If you do not payback in time, lenders may report your status to credit bureaus.
Now that we have learned how payday loans work lets get into the very details.
The first thing that bothers people is the APR of the payday loans. Because this one is highly talked about in the media and online journals. Frankly one should not bother about the APR. Lenders will tell the exact amount you have to pay once the loan is due. If you are taking a loan, your biggest concern should be whether you are comfortable paying that amount back to the lender on the due day. Lets take an example:
Lets suppose you take a loan for $300 at $15 per $100 borrowed for 14 days (two weeks). (Note that this rate is very normal. Most lenders charge this.) If you calculate the APR it is: 391.07%. Now that looks huge especially compared to a mortgage that you can get at 5% or lower. But are you actually paying that APR? On paper yes, but in reality you are only paying 300+45 = $345 back after 14 days. Your concern should be – will you be able to payback the lender $345 after 14 days. Period. Will that won’t be a problem. If not, you should go ahead with the loan and not bother about the APR that is being advertised.
Now is the word of caution. APR will become a huge problem though, if you do not payback the loan in time, this 391.07% will be a killer as time passes. Consider this if you do not payback the loan for one year you will need to payback $1,473.21 to the lender after one year that is almost five times the money you borrowed.
What you learn? It is that if you have taken a loan with very high interest rate, payday or whatever, you should payback the whole loan in your very first due date. Else this will escalate into a situation which will get very hard to manage.
Many financial pundits advise against payday loans. Are they really that bad? Should you not take a payday loan? Its great if you have the cash flow or can get cash from some other place or people like friends or family members. The point is what if you don’t? Lets suppose your car needs an emergency repair else you may not be able to attend office and there are pay-deductions. Compare a payday loan fee to the deductions from your salary. We bet salary-deductions will be a major issue than paying a small fee to the lender. This fee will be fraction of what happens if your employer deducted your pay.
In short, if you really need the cash and cannot arrange it from any other source – you should get yourself a payday loan to fix the emergency situation to avoid from any major issues that may happen due to it. However to avoid any major hassles, payback the loan in time.
What is a rollover?
A rollover happens when you have difficulties paying back you loan. Your loan is given an extension for another 14 days (or 30 days if you payday is 30 days away). However it is not free. You will need to pay a fee for rollover. Typically this fee is equal to the fee you had to originally pay. In our case it was $45. So if you pay $45 as fee, your lender will give you extension for another 14 days after which you have to pay $345. Your total fee for the month = 45+45 = $90. Did you see APR at work?
Rollover should never be taken. It can be taken only if you find it very difficult to payback. Or you have some even more important emergency to attend. It should be limited to one. In any case there are laws regarding rollovers in every state, or your lender may not offer you more than 3 rollovers.
If the loan fee is so small how lenders make money?
Millions of people apply for a payday loan everyday. Either on the Internet or in a shop or by phone. Even if 20% of them gets approved that’s a lot of people being approved for a loan everyday. In fact payday loan today is a $40 billion-per-year industry in the United States.
Rollovers are the one that makes most money for the lenders. Many borrowers repeatedly roll over the loans. Lenders are more than happy to roll over as they make almost 50% of the original amount as fee if they rollover thrice. Yes its true that if people did not rollover, lenders income will significantly reduce.
Payday lenders have other businesses as well like foreign currency exchange, utility bill payments, license processing and other finance related business.
What information is required to get a payday loan?
Lenders may ask several questions like name, address, social security, bank account number, bank routing number, employment information etc. You may also have to give information about a few of your family members or friends. In case you default lenders may inquire about you from them. But in any case they cannot harass them.
Is your personal information safe?
This is very difficult to answer this as it depends on with whom you are applying. Like in any other industry, there are crooks in payday industry as well. But in our experience most lenders are not there to steal your identity. If you don’t know, identity theft is a serious crime in USA. Lenders know this and don’t want to get into any hassles in their business. Heck, they are already in a risky business, so we don’t think they will want to take another risk. They are very busy managing their business and calling people who haven’t paid them. But yes, some of them do sell your data to third parties. Now what these third parties can do is something that you can guess.
As long as we can remember in the recent past no one has ever complained for identity theft against any payday lender. If at all, complaints have been made for high interest rates and harassment, but not for identity-theft.
It is safe to apply for a payday loan, only thing is please do read lenders terms and conditions.
Why payday lending is popular in the United States?
That is because banks refuse to give a loan as small as $500. Interestingly many emergencies need only $500 or less to fix. This created a gap in the market place, which payday lenders filled.
Any other information?
Payday loans are illegal in 13 states in the United States. It cannot be sold to military personal as well.
If you really need a payday loan you should research the rates first before deciding the lender. Do not pay anything more than $15 per $100 borrowed for 14 days. Forget the APR, just see the fee. Also do read the terms before accepting the loan. Ask your lender if you cannot understand something there. Be prepared to pay the loan back in full on the due date.
Some banks do offer payday loans. But we are against it. The banks have full control over your account. If you are unable to pay, banks can do anything to your account to get their money. If you want to do something else with that money you wont be able to withdraw. Banks would have already withdrawn it. And also it will get very hard for you to fight against these again banks for a few hundred dollars. Its better you avoid banks. Further banks have many customers, they are not interested in your problems. You lender will at least listen to you, banks won’t.
Thank you for visiting our website. Hope we helped you get a loan.
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