Payday loans can be tempting: They promise fast cash with no credit checks. That can be appealing if you’re facing a financial emergency.
But be careful: Payday loans can provide you with a chunk of cash, but that cash comes at a high price. And that price will become even steeper if you fail to pay back your payday loan on time.
What Is A Payday Loan?
There is no one definition of what a payday loan is. But the Consumer Financial Protection Bureau says that these loans are for small amounts of cash – $500 or less, usually – and due in a short time, usually on the date of your next payday.
You can find these loans from private lenders, many of which state that they specialize in payday loans. Qualifying for these loans isn’t a challenge: As the Consumer Financial Protection Bureau says, payday lenders often promise that they’ll approve borrowers for these loans without first checking their credit or their ability repay.
People often turn to payday loans – also known as payday advance, cash advance, deferred deposit and check advance loans – when they need a small amount of cash in a hurry. Maybe someone needs money to pay the electric bill. Some borrowers might need fast cash to pay for repairs on a car.
The problem is that borrowing money in this way can get very expensive. The fees that payday lenders charge can be high. It’s why agencies such as the Consumer Financial Protection Bureau and the Federal Trade Commission recommend that borrowers search for alternatives to payday loans.
How Do Payday Loans Work?
- According to the Federal Trade Commission, borrowers write a personal check payable to the payday lender for the amount they want to borrow plus any fees.
- Lenders then give the borrowers the online payday loans Greenhills OH amount of the check less the fee. They hold onto this check until borrowers repay the loan. This repayment date is usually the same as the next payday for the borrowers. Other borrowers must give payday lenders authorization to electronically withdraw the funds from their bank, credit union or prepaid card account, according to the Consumer Financial Protection Bureau.
- If borrowers don’t repay their loans on or before their due date, lenders can cash their check or electronically withdraw the money from their accounts.
- These loans are not cheap. The Consumer Financial Protection Bureau says that many states set a maximum amount for payday loan fees that ranges from $10 – $30 for every $100 borrowers take out. According to the bureau, a 2-week payday loan with a fee of $15 for every $100 paid out comes out to an annual percentage rate, or APR, of nearly 400%.
APR is a measure of how much it costs to borrow money. As a comparison, the Consumer Financial Protection Bureau says that APRs on credit cards typically range from 12% – 30%.
The Dangers Of Payday Loans
They cost too much: The fees that come with payday loans are high. The Federal Trade Commission said that it’s not unusual for lenders to charge $15 or more for every $100 you borrow. If you borrow $500, you’d pay $75.
Rollover fees: When your due date arrives, your lender might offer you the chance to rollover your loan until your next payday. This means you wouldn’t have to repay your loan for, perhaps, another 14 days. This service isn’t free, though. Lenders will charge you another fee for this rollover. As an example, maybe you borrowed $100 for a fee of $15. When your due date arrives, you decide to rollover your loan for another 2 weeks. Your lender charges you another $15 for this. This means that your fees have now increased to $30. It’s easy to rack up hefty charges this way.