FAQ
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A payday loan generally describes a short-term, high-cost small personal loan that’s designed to be repaid on your next pay day, usually around a two-to-four-week loan term. The terms and structure can vary by state, payday lender and individual loan.
Borrowers can apply for a payday loan by filling out a loan application and submitting pay stubs. These short-term loans are usually for small amounts and often come with set fees based on the loan amount. For example, the Consumer Financial Protection Bureau (CFPB) describes a typical fee for a payday loan as $15 for every $100 you borrow. This is the same as an annual percentage rate (APR) of nearly 400% interest. For comparison, credit card interest rates typically range between 12% and 30%.
In exchange for a payday loan, the borrower usually gives the lender a postdated check for the full amount borrowed, plus fees. Or the borrower might authorize the lender to electronically withdraw that amount from their bank account on the due date.
Typically, the sooner a person can pay off a payday loan the better.
Payday loans offer a fixed interest rate rather than a variable interest rate. That’s because repayment of the cash loans are expected to be in the form of one lump sum. Payday lenders are required by the federal Truth in Lending Act to divulge any finance charges placed on a loan.
The CFPB warns of numerous other fees and costs associated with payday loans. These can include rollover fees if you need to extend the duration of your loan, late fees for missing a payment, overdraft and non-sufficient funds (NSF) fees if your bank account is short when the payment is processed and more.
Additional fees may be added to your loan if the funds are loaded onto a prepaid debit card.
A typical payday loan doesn’t require a credit check or proof of your ability to repay the loan. This can be part of the appeal for borrowers with no credit or those who are rebuilding credit and may not have other financing options. But according to Experian, these loans also can’t help you build your credit if they aren’t reported to the credit bureaus when you pay them on time.
However, if you’re late on payments—or if you’re unable to repay and default on your payday loan—the same might not be true. A payday lender might report your late or missing payments to the credit bureaus. In that case, it could still harm your credit scores.
Payday loans are considered unsecured loans because they don’t involve collateral.
Like all loans, a payday loan may or may not be right for you depending on your financial situation and needs. The risks of payday loans are typically high costs and short terms. Some borrowers are not able to repay their loan before the payment due date. When considering a payday loan, carefully research the lender and terms and conditions of the loan to determine whether the loan is right for you.
