A payday loan is a type of short-term, high-credit borrowing wherein the amount you can acquire is based on your income. You will generally need to provide a pay stub when applying for this loan, and it is typically due for repayment on your next payday. Although you can apply for a payday loan online, you can alternatively go to a payday loan store. In the states where such stores are legal in America, these payday shops are notably common and have even overtaken chain stores such as McDonald’s in their numbers. But what is a payday loan, and why are their stores so popular in the US?
Payday Loan Stores in the US
There are approximately 23,000 payday lenders across the US – almost twice the number of McDonald’s restaurants. The state with the most payday loan stores is California, which currently houses over 2,000 stores. Tennessee comes in second, and Mississippi in a close third.
In every state, laws concerning payday loans vary. For example, interest rates fluctuate from state to state. Over the last few months, a handful of states have moved to limit payday loan interest rates in an effort to protect consumers from getting in over their heads with these traditionally high-cost loans.
For example, during the November 2020 general election, voters in Nebraska voted to cap payday loan interest rates in the state at 36% whilst in January 2021 Illinois declared a similar cap. Nonetheless, payday loans are still available in over half of the US states without many strict restrictions.
Typically, consumers simply need to walk into a lender with a valid ID, proof of income and a bank account to withdraw a payday loan.
Therefore, with around 200 million Americans living in states that allow payday lending without heavy restrictions and, according to CRL, such loans increasing in popularity even during the pandemic, it looks like these payday loan stores aren’t going anywhere anytime soon.
Laws, APR and Uses in Different States
Currently, there are a handful of states – Arkansas, Arizona, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont and West Virginia — and D.C. that cap payday loan interest at 36% or lower, according to CRL.
However, in states that do not have rate caps, the interest can be sky-high. Texas has overtaken Ohio in the past three years as having the highest payday loan rates in the US. The typical APR for a loan is 664% – more than 40 times the average credit card interest rate of 16.12%. Since its overtake, Ohio (which used to have an interest rate of 667%) has put restrictions on rates, loan amounts and duration.
Due to their interest rates, The Pew Charitable Trusts reports that it takes borrowers roughly five months to pay off the loans and costs them an average of $520 in finance charges.
The rate of borrowers taking out payday loans trippled across the whole of the US as a result of the pandemic, a survey by Gusto of 530 small business workers found. But why do so many feel the need to withdraw a payday loan?
Why Borrow a Payday Loan?
A payday loan is a kind of unsecured personal loan, meaning that it doesn’t require collateral. However, these loans do charge borrowers high levels of interest and you will have a short time frame to make the repayment, usually 30 days or less.
Their high-interest rates and the limited repayment schedule may leave you wondering how they acquired such popularity, however payday loans can, in fact, be very useful to those who are in need of some quick emergency cash. These loans pay out quickly and can lend in small amounts (even down to $100) and may not even require a credit check to withdraw. This means that payday loans can be utilized by people who may have had issues with their banking history, or perhaps those who only need to borrow a small amount of cash (although you may withdraw such loans into the triple figures).
A payday loan can be very valuable to those who need to, for example, cover household bills such as a boiler or other appliance breaking. An unforeseen event, such as a funeral or the breakdown of a personal relationship, may also trigger the need for emergency cash, whilst a vehicle repair may cause a similar need for money.
By withdrawing a payday loan, you can get access to the cash you may desperately need in as little as a day. You can do this in-store, but if you need the money very quickly, it may be faster to simply withdraw the loan online.
How to Borrow a Payday Loan in Store
Payday loan providers are typically small credit merchants with physical stores that allow on-site credit applications and approval.
To complete a payday loan application, you must usually provide pay stubs from your employer that show your current level of income. Your loan will then be based on a percentage of your predicted income. Lenders typically do not conduct a full credit check or consider your ability to repay the loan, so the process can be relatively speedy.
Simply check for payday stores near you, and ensure that they are a legal establishment with reliable reviews to avoid any nasty financial consequences.
Is a Payday Loan Right for Me?
Before attempting to apply for a payday loan, either in-store or online, you must first be sure to check if these loans are available in your state. Payday loans are not available in all states. Sixteen states—Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia—plus the District of Columbia outlaw payday loans of any kind.
Once you have checked if payday loans are available in your state, there are some other things to consider before applying. Payday loans charge their borrowers such high levels of interest they may be considered predatory lending. These loans have extremely high interest, do not consider a borrower’s ability to repay, and have hidden provisions that charge borrowers added fees.
As a result, they can create a debt trap for consumers. If you’re considering a payday loan, you must seriously consider if you will have the money for repayment later if you do not have the money now. You must have a responsible repayment plan and make sure that you will not need to roll over your loan to give you more time to pay. In the US, payday loans can have interest rates of up to 600%, so it is important you don’t let the repayment of the loan drag out and cripple you financially.
Before applying for a payday loan, you may want to first have a look at some safer alternatives.
What Alternatives are There in the US?
A payday loan can sometimes be beneficial to a borrower if they need cash quickly as a necessity for an emergency. Nonetheless, due to the debt traps such loans can become, it would be beneficial to consider your options first.
Some alternatives you may want to consider before applying for a payday loan are:
- Using any savings that you have built up
- Drawing a home equity loan, if you have managed to build up enough equity in your home
- Borrowing from a family member or friend
- Negotiating a payment plan for a bill instead
The number of payday loan stores throughout the US is a big indication of how popular they are, nevertheless, payday loans should be avoided unless they are an absolute necessity due to the danger their high-interest rates can cause.