A payday loan is a short-term loan. Typically, it charges a higher interest rate and some added fees. The amount and interest rate are based on the income and credit history of the borrower. It helps cover the immediate need for cash. An application is needed to secure a payday loan. The loan might be received through check or cash. In the United States, different states have laws regarding pay loans. These laws may restrict the amount of loan, interest rate, and other rules and restrictions. Typically, the payday principal amount needs to be repaid along with accrued interest within 14 days. In some cases, this can be extended to the next paycheck date. 32 states in the United States allow payday loans.
Maximum Amount of Loan
According to the CFPB (Consumer Financial Protection Bureau), an average payday loan is $350 with return payment terms of 14 days. Depending on the state, the payday loan can vary from $50 to $10000. Some states such as Utah, Maine, and others do not have a maximum limit. There are some states such as Nevada, New Mexico that allow up to 25% of borrower’s monthly income. The payday lenders should be able to guide clients on the rules and restrictions of each state.
Licensed Payday Lender
State laws require a payday lender to be licensed. Any loan taken from an unlicensed lender can be declared void. That means the lender is not able to legally recover the loan. The source of information would be to check with the state bank or state attorney general.
Cost of Loan
This depends on the lender and state. Typically, payday loan fees range from 10-30% of the amount borrowed. It is important to understand this is the rate for the period of the loan, not the annual percentage rate (APR).
Option to Rollover Loan
Some lenders allow rollover of payday loans. This provides the borrower more time to repay the loan but it also means a higher amount of interest accrued for the borrower. If this becomes a cycle, it can spiral out of control and the borrower could end up with a very large amount due.
How Does Payday Loan Affect Credit Score?
This depends on the lender. Some lenders do not run a credit check, so just applying for the loan should not affect the credit score. However, if the borrower becomes delinquent, that would affect the credit score. In most cases, there is a grace period before the lender’s hands over the case to a collection agency.
There are some alternate options for a payday loan. Some private or personal loans can offer betters terms than a payday loan. Borrowing from friends and family can be a good option too. Using credit cards is another option. Payday loans are not inherently bad. There can be a situation where urgent cash is needed. As long as the cash is used for something important and repaid as quickly as possible, these types of loans can be a useful option.