What Is the Process of Getting a Payday Loan?

Payday loans have become the face of predatory lending in America for one reason: a payday loan’s average interest rate is 391 percent, and it can go up to 600 percent!

If you can’t pay back the loans — according to the Consumer Financial Protection Bureau, 80 percent of payday loans aren’t repaid within two weeks – the interest rate will skyrocket, and the amount you owe will skyrocket, making it nearly difficult to repay.

You may believe that a payday loan is the only way to pay off a debt or handle an unexpected payment, but the truth is that a payday loan will cost you more than the problem you’re attempting to address. It’ll cost you more than whatever late fees or bounced check fees you’re avoiding.

Compare payday loan interest rates of 391 percent to 600 percent to the average rate for other options such as credit cards (15 percent -30 percent); debt management programs (8 percent -10 percent); personal loans (14 percent -35 percent); and online lending (14 percent -35 percent) (10 percent -35 percent ). Is it even a viable idea to take for a payday loan?

To some extent, some states have clamped down on exorbitant interest rates. Payday loans are illegal in 12 states, and interest on a $300 loan is capped at 36 percent in 18 others. 45 states and Washington, D.C. have restrictions on $500 loans, however some are quite high. 38.5 percent is the median. However, some states have no caps at all. In Texas, interest on a $300 loan can be as high as 662 percent. What does this imply in terms of numbers? It means that if you pay it back in two weeks, you’ll have to pay $370. It will cost $1,001 if it takes five months.

According to the Pew Charitable Trusts, the average length of time it takes to repay a $300 payday loan is five months.

So, before you go out and redirect to payday now, make sure you know what payday loans are all about.

Changes to Payday Loans are being rescinded.

The Consumer Financial Protection Bureau (CFPB) implemented a series of regulations in 2017 to help protect borrowers, including the Mandatory Underwriting Rule, which requires payday lenders (also known as “small dollar lenders”) to determine whether a borrower can afford a loan with a 391 percent interest rate.

The Trump administration, however, dismissed the necessity for consumer protection, and the CPFB repealed the underwriting requirement in 2020.

Other safeguards linked to loan repayment remain in place, including:

  • The borrower’s car title cannot be used as security for a loan.
  • A lender cannot make a loan to a person who has already taken out a short-term loan.
  • The lender can only extend loans to borrowers who have paid at least one-third of the outstanding principal on each extension.
  • Lenders must inform all borrowers about the Principal Payoff Option.
  • If the money isn’t there, lenders can’t keep trying to take money from the borrower’s account.
  • Congress and states are also seeking to improve protections, including a proposal to extend the 36 percent interest cap to all states. Illinois, Indiana, Minnesota, Tennessee, and Virginia all imposed interest rate caps on payday loans in 2021.

What Is the Process of Getting a Payday Loan?

Payday loans are a quick cure for people in financial trouble, but they are also budget busters for families and individuals.

A payday loan works like this:

Consumers fill out a registration form in person or online at a payday lending location. Only identification, a recent pay stub, and a bank account number are required.

Depending on your state’s laws, loan amounts range from $50 to $1,000. If you’re approved, you’ll either get cash right away or have it placed in your bank account in one or two days.

The borrower’s next payday, which is usually two weeks away, is when the whole payment is due.

Borrowers can either postdate a personal check to match their next paycheck or allow the lender to take money out of their account automatically.

For every $100 borrowed, payday lenders often charge $15-$20 in interest. Payday loans have an annual percentage rate (APR) ranging from 391 percent to more than 521 percent, which is the same as credit cards, mortgages, auto loans, and other loans.

What Happens If You Can’t Pay Back Your Payday Loan?

If a borrower is unable to repay the loan within the two-week period, they can request that the lender “roll over” the debt. If the borrower’s state allows it, the loan is extended after the borrower pays any costs that are due. However, interest rates and finance charges rise.

The average payday loan, for example, is $375. The customer owes $56.25 in financing charges for a total loan amount of $431.25, based on the lowest finance charge available ($15 per $100 borrowed).

The new sum would be $495.94 if they elected to “roll over” the payday loan. That is $431.25 plus $64.69 interest fee for a total of $495.94.

In just one month, a $375 loan becomes nearly $500.

How Are Finance Charges on Payday Loans Calculated?

In 2021, the average payday loan was $375. For a $375 loan, the typical interest – or “finance fee,” as payday lenders call it – would range from $56.25 to $75, depending on the circumstances.

Depending on the lender, the interest/finance fee is normally between 15 and 20 percent, although it could be higher. The maximum interest rate that a payday lender can charge is regulated by state law.

By multiplying the amount borrowed by the interest rate, the amount of interest paid is computed.

From a mathematical sense, a 15 percent loan looks like this: 375 x.15 = 56.25. If you agreed to terms of $20 for $100 borrowed (20%), the equation would be 375 x.20 = 75.

This means you’ll have to pay $56.25 in order to borrow $375. That’s a 391 percent annual percentage rate. If you pay $20 for $100 borrowed, you’ll spend $75 in financing charges and a 521 percent annual percentage rate.

How Are Interest Rates on Payday Loans Calculated?

Divide the amount of interest paid by the amount borrowed, multiply by 365, divide by the length of repayment term, and multiply by 100 to get the annual percentage interest rate (APR) for payday loans.

In terms of math, the APR on a $375 loan is calculated as follows:

56.25 375 =.15 x 365 = 54.75 14 = 3.91 x 100 = 391 percent 56.25 375 =.15 x 365 = 54.75 14 = 3.91 x 100 = 391 percent

It looks like this for the $20 per $100 borrowed (or 20%) on a $375 loan: 75 375 =.2 x 365 = 73 14 = 5.21 x 100 = 521 percent.

The APR is astronomically greater than any other lending option available. Even at the highest credit card rate available, you would pay less than one-tenth the amount of interest on a payday loan if you used a credit card instead.

Alternatives to Payday Loans

According to surveys, 12 million Americans take out payday loans each year, despite the fact that there is strong evidence that they cause most borrowers to go even more in debt.

There are alternatives to payday loans if you want to get out of debt. The easiest areas to start are community organizations, churches, and private charities.

Paycheck advance: Many employers provide employees with the opportunity to receive money earned before their next paycheck is due. If an employee has worked seven days and the next planned payday isn’t for another five days, the employer can pay the employee for the seven days. It isn’t a loan at all. It will be deducted from your next paycheck.

Borrow money from family or friends: Borrowing money from family or friends is a quick and frequently inexpensive option to get out of problems. You’d expect to pay a much lower interest rate and a lot longer repayment period than two weeks, but make sure this is a business arrangement that benefits both parties. Make a loan agreement that spells out the terms of the loan. And you should stick to it.

Credit Counseling: Nonprofit credit counseling organizations such as InCharge Debt Solutions provide free guidance on how to create a manageable monthly budget and pay down debt. Credit counselors at InCharge can refer you to resources in your region that can help with food, clothing, rent, and utility bills to help people get through a financial crisis.

Debt management programs: For a monthly charge, non-profit credit counseling services such as InCharge offer debt management plans to help people pay off credit card debt. The creditor offers the agency a cheaper interest rate, and you can decide whether or not to take it. The agency pays the creditors, and you pay the agency one monthly payment, freeing up funds to pay your expenses and reduce your debt. The plan takes 3-5 years to pay off the debt.

Debt Settlement: If you’re constantly out of money due to unsecured debt (credit cards, hospital bills, personal loans), you may want to consider debt settlement as a debt-relief alternative. Debt settlement entails negotiating a lower payment than you owe, but it leaves a significant mark on your credit report and has a significant impact on your credit score.

Local charities and churches: If you’ve reached a snag, you’ll be surprised at how many charities and churches are eager to help you out for free. When all you need is a few hundred dollars to get through a bad patch, organizations like United Way, Salvation Army, and church-sponsored programs like the St. Vincent de Paul Society regularly step in.

Local banks and credit unions: The regulations allow community banks and credit unions to provide smaller loans with more flexible payback conditions than large regional or national banks. Call or come in to compare interest rates, which might be as low as 10% -12% compared to 400%-500% on payday loans.

Peer-to-Peer Lending: If you’re still having trouble finding a lender, look into peer-to-peer lending sites online. The interest rates could be close to 35 percent, which is more than the 6 percent rate offered to those with excellent credit, but it’s still a lot better than the 391 percent offered by a payday lender.

Ann G. Starbuck