A payday loans is a high cost, short-term loan for a small amount, typically $400 or less, that’s meant to be repaid with the borrower’s next paycheck. Payday loans require only proof of identification, income, and a bank account and are often made to people who have bad or non-existent credit.
Financial experts caution against payday loans — mainly if there’s any chance the borrower can’t repay the loan immediately — and recommend alternative lending sources instead.
How do Payday Loans Work?
A payday lender will approve your income and checking account information and deliver cash then and there at a store or, if the transaction is done online, as early as the same day.
In exchange, the moneylender will ask for a signed check or permission to electronically draw money from your bank account. The lend is due immediately after your next payday, naturally in two weeks but sometimes in one month.
If the loan is issued at a store, you may return before or on the day the loan is due to repay. If you don’t show up, the lender will run the check or make the withdrawal for the loan amount plus interest. Online lenders use an electronic withdrawal.
How much can you get from a Payday Loan?
The amount you can borrow fluctuates according to your state’s laws and your finances. But a payday loan is typically $500 or less.
This doesn’t mean you’ll be approved for the highest amount allowed by law. A payday lender may consider your income when deciding how much you can borrow. However, other payday lenders may not evaluate your ability to repay or your other obligations, leaving you at risk of financially overextending yourself.
Do Payday Loans Help Build Credit?
Payday lenders generally don’t report payments to the credit bureaus, so a payday loan is unlikely to improve your credit score.
However, if you don’t repay your loan, your payday lender could sell it to a debt collection agency. That agency could then report your unpaid debt to one or more of the credit bureaus, and it would show up on your credit report. Since your credit score is calculated by the activity on your credit report, this could cause your credit score to go down.
Alternatively, if you don’t pay your debt, your payday lender could sue you for nonpayment. In that case, if you lose the lawsuit, it could also show up on your credit reports.
If you want to build your credit, consider a credit builder loan or take steps to improve your credit score by paying your fliers on time and inspecting your credit report for errors.
Before agreeing to a loan, many payday lenders will ask you to set up a habitual payment (also known as a constant payment authority or CPA).
This lets them take what you owe directly from your bank account via your debit card on the repayment date.
This can be handy, but it is risky. It might not leave you with enough money in your account for other bill payments. Such as debt or rent, or other essential spending, such as heating or food. And it could take you over your overdraft limit, leading to bank charges.
If you don’t feel a CPA will give you enough control over your finances, ask the lender if you can help in other ways. You can cancel a CPA at any time – but you will still owe the debt. So you will need to repay it in another way.
Other Repayment Options
Before you set up a recurring payment for a payday loan. Make sure you understand what your other options are and how they work.
By signing a Direct Debit Instruction, you give authority to another party to collect money from your bank account. You benefit from the Direct Debit Guarantee Scheme, which protects you if there’s an error in the payment. Direct Debit payments can vary in amount, depending on how much is due.
This is when you give authority to your bank or building society to make systematic payments to another party by signing a form setting out the amounts and dates for the expenses. Unlike Direct Debits, standing orders are for a fixed amount.
Payday loans can be a rapid and easy way to get cash when you need it. However, they are also very expensive, and they can trap debtors in a cycle of debt. Overall, payday loans can be a risky proposition. If you are considering taking out a payday loan, it is essential to weigh the pros and cons carefully. There are other, less expensive options available, such as credit cards or personal loans.