In an ever more competitive world, saving pennies for a rainy day is sometimes easier said than done. When the going gets tough, cash-crunched Americans can turn to payday loans to get going. A payday loan is a small, unsecured loan in an amount ranging from $100 to $1500 that borrowers take against their paycheck and repay on the following payday, or in two weeks. This financial product is alternatively known as a paycheck advance, payday advance, cash advance, fast cash, a short-term loan, a bad credit loan, and a check advance. Pay day loans address the temporary liquidity needs of individuals who find themselves in the midst of a financial emergency or in need of bridging the monetary gap between paydays. They offer consumers convenience and speed and are easier to qualify for than traditional credit. Payday loans typically cover a wide range of expenses and serve multiple purposes including the following:
- Extra cash in borrowers’ wallets
- Mortgage/rent payments
- Auto repair bills
- Urgent medical expenses such as hospitalization
- Utility bills
- Payment of household bills such as school supplies and groceries
- Transportation expenses
- Vacations or leisure-related expenses
- Avoidance of late fees, overdraft charges, and bounced check fees
- Payment of creditors
- Holiday shopping
The finance charge on a two-week loan of $100 ranges from $15 to $30, which translates into an annual percentage rate (APR) of 390 to 780 percent. A finance charge refers to the cost of credit in dollars or the amount of interest that a borrower pays to obtain credit. The APR, which represents the yearly cost of credit expressed in percentage form, enables consumers to compare the cost of different loans or types of credit. A number of states have passed usury laws, which place a ceiling on the interest rates charged by lenders. Some also regulate the number of outstanding loans that a borrower can have at a single time, place a cap on the number of loans that a borrower may take out annually, and/or prohibit or restrict the number of rollovers or loan extensions that a lender may grant. Loan calculators enable consumers to determine the APR, finance charge, and repayment amount. Prospective borrowers need simply input the finance rate, loan amount, and desired term of the loan.
Unlike credit card companies and banks, payday lenders waive the credit check requirement. Payday loans are loans for people with bad credit, such as those with charge-offs, foreclosures, or bankruptcies on their credit report. Individuals with a negative credit history or no credit are not disqualified from receiving a payday advance. Another advantage of fast cash is that it may be obtained 24/7 from the comfort of one’s home without needing to visit or wait in line at a brick and mortar payday loan store. The application form, which may be faxed or submitted online, generally takes only minutes to complete. Borrowers do not need to pledge collateral or obtain a co-signer; their paycheck and job serve as collateral. Although eligibility criteria vary from one company to the next, the following minimum requirements must be met:
- Be at least 18 years of age;
- Be currently employed and hold the same job since at least 90 days
- Have a minimum monthly income of $1,000
- Have a savings or checking account with direct deposit
Applicants must also submit personal data such as name, social security number, paycheck stub (sometimes), contact information, and driver’s license.
With faxless payday loans, also known as no fax payday loans, applicants need not fax any documents or submit any paperwork.
Payday lenders approve applications instantly, often in a matter of hours and sometimes in less than an hour. Generally, the funds are electronically disbursed into the borrower’s checking or savings account in less than one hour or at most within 24 hours. Online payday loan providers safeguard the integrity, confidentiality, and security of borrowers’ personal information by encrypting the latter via a 128-bit secure socket layer (SSL) server. Payday advance websites generally contain a privacy policy concerning customers’ sensitive and personal data.
On the borrower’s payday, the lender withdraws the finance charge. Typically, consumers are offered the following repayment options: 1) Automatic withdrawal, 2) payment in full, 3) loan renewal and payment of fees and interest, or 4) loan rollover and payment of interest and a portion of the principal. Many lenders offer customers the opportunity to rollover or extend their loan for another two weeks. Borrowers must pay a fee to renew their payday loan (i.e. $25 on a $100 loan). A payday advance costs less than a bounced check, an overdraft fee, or a late fee on an outstanding credit card balance.
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