Understanding the Basics of Payday Loans

A payday loan is a short-term financial solution that can help you manage your immediate cash needs until you receive your next paycheck. These small, high-cost loans typically come with triple-digit annual percentage rates (APR) and payments are usually due within two weeks or close to your next payday. Payday loans are a type of short-term credit that is based on your income. Generally, the loan is secured by a portion of your upcoming paycheck. Payday loans are known for their high interest rates and quick access to cash.

They are also referred to as cash advance loans or check advance loans. These loans are usually fast cash for small amounts that must be repaid in a single payment. If the loan is not fully repaid by the due date, additional fees are usually charged and the due date is extended. This can lead to a vicious cycle of reborrowing, resulting in more and more fees. The Military Lending Act (MLA) has expanded protections for military personnel.

This includes a 36% Military Annual Percentage Rate (MAPR) cap for a variety of credit products, including payday loans, vehicle title loans, installment loans, deposit advance loans, open lines of credit without collateral, and more. Payday loans can be a quick fix for people in financial distress, but they can also be budget-breaking expenses for families and individuals. The Consumer Financial Protection Bureau (CFPB) found that 80% of payday borrowers tracked had taken out seven or more loans over ten months. Check NerdWallet's database of local alternatives to payday loans to see what's available in your state. In many states that allow payday loans, the cost of the loan, fees, and maximum loan amount are capped.

However, whether offered by an online payday lender or a check cashing shop in your neighborhood, these loans come with high costs that can be difficult to recover from and should be considered a last resort after all other options have been exhausted. Under federal law, lenders cannot condition a payday loan on obtaining a consumer authorization for “pre-authorized (recurring) electronic fund transfers”. These protections include a 36% cap on the Military Annual Percentage Rate (MAPR), as well as other limitations on what lenders can charge for payday and other consumer loans. However, if the loan is not paid back in full by the due date, it can be sent to collections and the lender may still pursue repayment. If you are considering taking out a payday loan, you may first want to look into safer personal loan alternatives. All that is required to get a payday loan is an open bank account in good standing, a steady source of income, and identification.

In some cases, borrowers give electronic access to their bank accounts to receive and repay payday loans. In the long run, it is important to address the underlying financial issues that led you to seek out a payday loan. If you are considering applying for a payday loan, a personal loan calculator can be an invaluable tool in determining what type of interest rate you can afford.

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