Payday loans are very common in the USA. By 2021, around 12 million Americans were using payday loans each year. Although there is no set definition of a payday loan, they are generally a short-term, unsecured, high-cost loan that may lend borrowers between $100 and $1000, although they often have a $500 limit size, meaning a $500 loan is a maximum some people can borrow. As opposed to an installment loan, payday loans are typically due in a lump sum on or around the day of your next pay check.
Depending on your state laws, these loans may be available online or through storefront payday lenders, although not all payday loans are legal in every state, so it is important to first check your state’s individual laws and regulations around being able to borrow money and payday lending. There are for example, states like Texas, Hawaii, Illinois and Florida, where payday lending, within the state laws is permitted, whereas there are other states such as New York where they are illegal.
There are various types of payday loans in the USA, and depending on which loan you take out, the features will vary. Payday loans can be secured or unsecured, the repayment plan can vary and the maximum loan size may also be different. You should make sure to check with your individual lender to determine the specific qualifications and application requirements you must meet when applying for your payday loan.
Why Do People Borrow Payday Loans?
Payday loans are useful to people who are in need of emergency cash, fast. These loans pay out quickly and may not require a credit check, so can be utilized even if you have had issues with your banking history,
A payday loan can help if you need to cover household bills, such as your boiler breaking. A vehicle repair, especially if your car is a necessity for work and you do not have access to public transport, may also cause you to take out such a loan. An unforeseen event, such as a funeral or the breakdown of a personal relationship, may also trigger the need for emergency cash.
By withdrawing a payday loan, you can get access to the money you need in as little as a day, especially if you withdraw an online loan.
Different Types of Payday Loans
There are different types of payday loans available in the USA, and thus it is important to consider all available loans in order for you to make the best and most suitable decision concerning your debt. Here, we will delve into different types of payday loans.
Cash Advance Loans
A cash advance loan is a short-term, unsecured payday loan. This loan can be used to pay off immediate expenses rather than waiting for your next pay cheque. This loan can provide a borrower with instant cash, usually on the same day as applying for the loan. When you apply for a cash advance loan online, it is likely that you will receive the decision from the lender almost immediately.
Much like a payday loan, cash advance loans can provide a borrower with money, for example around $500, which will be paid back to the lender over a set period (typically around a month) plus interest.
Deferred Deposit Loans
A deferred deposit loan is a transaction wherein the borrower presents a check to a Check Cashing business in exchange for a loan. The lender will then provide the consumer with the agreed amount, minus a fee, and defers depositing the check for a specific period of time.
Check Advance Loans
A payday loan and a cash advance loan are fundamentally the same in practice. They both allow you to borrow against your next pay check to meet your financial needs instantly.
Yet there are some differences. Cash advance loans are a newer concept than payday loans. Additionally, payday loans may charge high rates to apply whilst cash advance loans, instead of charging loan financing fees, may instead just prompt users to tip on their ‘free’ cash advance.
But what are the benefits of taking out a form of payday loan, and what are some of the things you should consider before applying to a lender for such a loan?
Are Payday Loans a Good Idea?
A payday loan can sometimes be beneficial to a borrower if they need cash quickly as a necessity for an emergency. As the loans do not always require a check on your baking history, they may be particularly suited to those who may have had issues with their banking history. For example, if someone has a bad credit score and cannot withdraw a certain amount of money from their bank, a payday loan could offer a way of getting a borrow the money which may, to them, be a real necessity. A payday loan may also allow a borrower to withdraw an amount too small for a bank to lend, such as $100.
However, payday loans can become a heft strain on your finances due to their high-interest rates. If you cannot make the repayment date, you will have to roll your debt over and you may have to borrow more in the future in order to pay it off, sinking you lower and lower into your debt.
This may additionally make you vulnerable to damaging your credit history. Just because your lender may not care about your credit, does not mean your banking history is safe. If you cannot repay the loan, by rolling over your debt you make yourself liable to damaging your credit score, affecting your future opportunities.
Furthermore, if you do not have the money now, you should seriously consider if you will have it in the future. If not, it would be best to avoid withdrawing any form of payday loan unless you cannot utilize an alternative choice. If you see yourself taking out a form of payday loan becoming a habit, you should also consider serious budgeting and a lifestyle change.
In conclusion, payday loans should be avoided unless there are an absolute necessity. Alternatives to getting out a payday loan include:
- Borrowing from a family or friend
- Using any savings you have built up
- Negotiating a payment plan for a bill instead
- If you’ve built up enough equity in your home, you may be eligible for a home equity loan
In the future, it would be beneficial to attempt to build up an emergency fund to prevent any future necessity of taking out another payday loan.