1. How do payday loans work?
Typically, the customer will write a postdated check to the payday loan lender for the full loan amount, plus a fee, to be cashed on the next paycheck. Some lenders require customers to give them full access to their checking account to take the full balance as a withdrawal on the customer’s next payday.
If the balance can’t be paid in full in one payment, the balance rolls into the next paycheck and incurs another finance charge.
Payday Loan Process
Whether you visit a walk-in location or use an online lender, the payday loan process usually works as follows:
- You provide income verification and checking account information to the lender
- You request a loan for a specific amount (a fee is included with this amount)
- Your loan is secured by a check or an authorization to debit your account
- You receive cash, a check, or a deposit into your account
- You repay the loan on your next payday or roll it over to future paychecks
2. How much do payday loans cost?
The interest and fees associated with payday loans is extremely high in comparison to other loan products. The fee that most payday loan companies charge is anywhere between $10-$30 per $100 borrowed.
High Fees and Interest
To give you an idea of how much interest that equals compared to other lending options, a loan of $100 with a $15 finance charge and a term of two weeks comes out to almost a 400% interest rate. Because of this high-interest rate, it’s recommended that you use payday loans with caution. It’s easy to get locked into a vicious cycle. One payday loan creates the need for a second, and this creates the need for a third, and so on.
3. Why payday loans are popular?
Many payday lenders advertise “fast cash,” “easy money,” or other. Payday loans have a reputation as a short-term solution for unexpected expenses. Unfortunately, there is a high price to pay for the ease of getting such a quick loan.
How Payday Loans Are Spent
According to PEW Charitable Trusts, 12 million people use payday loans every year. A typical borrower will use a payday loan eight times in a year at approximately $375 per loan.
Statistics show that 69% of people use payday loans for everyday expenses like food, mortgage payments, and utilities, while only 16% of people used this kind of loan for unexpected expenses like car repairs, home repairs, and medical care.
Who Is Using Payday Loans?
According to Pew, payday loan users share a few common trends and characteristics:
- 85% of those who use payday loans lack a four-year college degree
- 58% of those who use payday loans are renters
- 72% of borrowers have income below $40,000
Laws vary from state to state, with many states imposing rate caps and restrictions on the number of loans an individual can take out. Several states have eliminated payday lending completely because they are not permitted by the states.
4. What are alternatives to payday loans?
Consumers may turn to payday loans because they think it is the only option for emergency expenses. But there are other options available.
Friends & Family
Not everyone gets excited at the idea of borrowing from friends or family, but an awkward conversation could save you a lot of interest over time.
Another option is to contact your credit card company, utility company, or landlord and work out an alternative payment arrangement. In an emergency, you’d be surprised how flexible some creditors can be.
Banks & Credit Unions
Some credit unions and banks have even begun to offer services like payday loans but at much lower interest rates. The interest rates usually compare to a credit card rate, at around 20%.
State & Federal Assistance Programs
You may also qualify for financial assistance to help with your heating bill, housing costs, or food bills through the state or federal government.
Payday loans are not the best long-term solution for financial problems. If you do find yourself in a financial emergency, carefully consider the lender and proceed with caution. The more information you know about payday loans and the alternatives empowers you to make sound financial decisions in the future.
The content of this article is for informational purposes only and should not be construed as personalized legal, financial, or other advice. This article represents paid promotional material provided by or on behalf of Snap Finance, LLC, or its affiliates.