Payday loans have become increasingly popular in recent years because they enable cash-strapped consumers to make it to the end of the month or when they are next paid.
According to research by the Pew Charitable Trust, 12 million American consumers spend as much as $7.4 billion on them. Most of these borrowers do not qualify for a financial institution loan because of bad credit, no credit, or too much debt.
Customers can borrow small amounts–usually from $100 to $1,000–based on their earnings. A borrower gives the lender a personal cheque for the loan amount plus the fee. The lender will cash the cheque on the date the borrower is paid.
A lender may also accept an automatic payment from the customer’s bank account. Subject to state law, the agreement can be rolled over for an extra month for an additional fee.
Fee for an Emergency Loan
Agencies charge up to $30 for each $100 borrowed. Many companies are charging from 650% to 780% in interest per year. This may be a small charge to pay when you need quick access to cash.
However, when a borrower cannot pay and has to roll over the loan for another month, the fees add up and exceed the borrowed amount if he extends it several times. A lot of states have adopted laws that cap fees.
Requirements for a Payday Loan
Cash loans are easy to get. First, an applicant must have a steady source of income and be able to provide proof. He must also have a checking account in good standing.
Some lenders require that the account has been open for at least one month, with no overdrafts for at least two or three months. Applicants must not be under bankruptcy protection and have no intention of filing bankruptcy soon.
Some lenders have a minimum income requirement of $1,000 and require applicants to live in the same state that the lender is located. They may pull a credit report to verify the applicant’s information is correct.
Even if he has derogatory records on his report, the application may still be approved. Most states to do not allow a borrower to have more than one outstanding fast cash loan. Lenders must check the applicant’s name against the database before approving a loan.
Payday loans may be subject to U.S. state law. Some states limit how much you can borrow, cap the rate of interest, or limit the number of times the agreement can be rolled over.
For example, in Arizona, you can borrow no more than $500, the interest rate is capped at 15% per month, and the debt cannot be rolled over more than three times. In other states, such as Georgia, they are strictly prohibited.
Since the Military Authorization Act in 2007, lending money to a military member is illegal.
The Bad Credit Loan Process
Many lenders have a convenient online application process. They may advertise 24-hour online approvals. It may take a little longer to receive approval during non-business hours and on weekends.
Once an applicant completes an application, the lender reviews it and requests the necessary documents. Usually, applicants can fax the documents directly or scan and email them.
If the application is approved, the borrower must accept the terms of service before they disburse the money. He can choose how he wants to receive the proceeds. Many lenders deposit the funds into the borrower’s bank account within an hour or two.
However, it may take a longer during non-working hours. Lenders can also mail a cashier’s check. Some companies may disburse the funds in cash if the borrower is willing to pick it up at one of their locations.
Repaying a Payday Loan
Most payday loans should be repaid in full the next time you are paid. A borrower can bring a full payment before the due date or wait for the lender to cash his check on the designated day.
They may set a payment plan up on large loans. The borrower gives them several checks to be cashed on specific dates. Many lenders also accept payments electronically from the borrower’s checking account.
If a borrower wishes to do so, he must sign an authorization allowing the lender to withdraw the funds on specific dates. If a borrower rolls the agreement over several times, the lender can request that the borrower pay extra to reduce the principal amount with each renewal.
What Are The Risks?
If a borrower does not have enough money to repay the balance on the specified date, the lender can extend the agreement to the next date that you are paid for an additional fee. It is important to keep in mind that the fees increase and quickly exceed the loan amount, if not paid off promptly.
Borrowers are being warned about unfair lending practices by some payday loan companies. Some of them automatically renew agreements on the designated day and take the finance charge from the borrower’s bank account instead of withdrawing the full amount.
Payday cash advance loans are not meant to be a long term financial solution. You cannot use them to fill the gap between paychecks. They are cash advances for emergencies only when a person cannot borrow money anywhere else.
They are supposed to be paid off in one or two pay periods. If you borrow again after you pay off the balance, you may need some help from a not-for-profit credit counsellor.