When is a Payday Loan a Good Idea?
Everyone counts the days til payday, and everyone wishes it would come sooner.
Sometimes, though, we don’t just need the money to go to the bar or to buy a new pair of shoes. It might be a utility shutoff notice, a bare pantry, an eviction letter.
The feeling is terrifying. You might feel hopeless. Anxious, even panicky. Desperate. If only payday could be two, three, five days sooner, the problem would be solved and you could get out of the woods.
So where will the money come from?
Side hustles take a while to ramp up. Or, you might be so busy with your job you don’t have time to take on extra work. You don’t have anything of value to sell. Your credit might not be so great.
What to do?
A payday loan can be a welcome relief from these tight spots in your life.
- Let’s look at the best way to get a payday loan and how small payday loans can help you.
Payday loans are typically small amounts, usually between $50 and $500. If you are a high earner, you may be able to get a larger amount in a payday loan (and up to $1000-$2500). A true payday loan will not be more than you can repay in your next paycheck.
You also may be able to get a short-term loan that you can pay back over a few months or pay periods. Depending on your income, your credit, and any collateral you can provide, you may be able to get a few hundred to a few thousand dollars this way. This is not strictly a payday loan as it covers more than one pay period, but many of the policies and procedures are the same.
The amount you get in a payday loan will also depend on where you live. Within the US, different states have different restrictions on payday loans. This is for the borrowers’ own protection. It prevents them from borrowing too much money, and from accumulating too many fees to be able to pay off the loan. In California, for instance, you can only borrow $300 in a payday loan. In Maine, on the other hand, you can borrow up to $4,000.
There are also several states that do not allow payday loans at all. Arkansas and Georgia, for example, have laws that make payday loans illegal. If you live in those states, you may have to find other forms of assistance.
Lenders who offer small payday loans generally make it very easy.
To get a payday loan, you need four things:
- At least 18 years of age.
- An active checking account.
- Proof of employment/proof of income.
- A reliable method of contact, such as an active cell phone number.
The classic method of getting a small payday loan is to write a postdated check for the total repayment amount, including interest and fees. This authorizes the lender to cash that check on payday. Now that checks are becoming obsolete, the payday loan is generally paperless. Instead of a postdated check for payday, you sign an electronic financial transfer (EFT) authorization. This way, the lender can withdraw the amount automatically from your account, without the risk of actual cash.
Different states have different regulations about not only how much can be borrowed, but how fast it must be paid off. This is generally within the two weeks of a standard pay period, but can be as long as 60 days.
Since payday loans are over a very short term, the fees will fit the time frame. Generally, the interest is anywhere between $10 and $30 per $100 lent. In the short term, this is between 10% and 30% of the amount borrowed. If you are using a payday loan purely to meet a short-term need, this interest rate is similar to a credit card interest rate.
However, this is where you have to be savvy when initiating a payday loan. If you cannot repay the payday loan and need to renew it for another month or two, the interest and fees begin to add up and become a much larger long-term interest rate.
Suppose you have a payday loan for $200 that comes with $40 in fees. Over the course of a 2-week loan, this would be a 20% interest rate. However, if you roll the loan into another payday loan to avoid paying it so soon, you would pay the entire loan amount in interest within five weeks. And over the course of a year, this would become a 520% APR (annual percentage rate).
The bottom line? Use a payday loan to cover a short-term emergency. But do not allow it to continue beyond your ability to pay.
If you work with a reputable lender, and are confident in your ability to repay the loan, small payday loans can be a safe solution to your financial problems.
Some states also have regulations in place to protect consumers. Most states that allow payday loans have limits on the interest rates or fees that lenders may charge, although not all. Be sure to learn your state’s regulations – this lets you protect yourself from unscrupulous lenders who may be charging illegal interest and fees.
A reputable lender will work with you to determine your ability to repay, a safe amount for you to borrow, and make sure you know your rights. The lender will disclose the interest rate to you before you agree to anything.
Who is qualified for payday loans?
Generally, lenders keep the requirements for a payday loan fairly open. A payday loan is meant for people who do not have other financing options, so just about anyone can get a payday loan.
Small payday loans generally require four things:
- ID to prove age of 18+
- Proof of employment and income
- Active checking account
- Reliable method of contact
Beyond this, the lender can make a personal decision to approve or deny a loan based on expected ability to pay.
No. The collateral for a small payday loan is your future paycheck, so payday lenders often do not check your credit score.
Payday loans do not build your credit score. Since lenders do not report payday loans to any credit bureau, these payments are not part of your credit history.
Payday Loan Alternatives
There are 18 states that don’t allow payday loans at all. If you live in one of these states, we still want to provide you with a list of resources that can help you.
- Finance apps: Apps like Dave or Earnin can offer a short term cash advance. The app does have some limits and restrictions, but it can serve as an alternative to a brick-and-mortar lender.
- Personal loans: Banks and credit unions can offer small-balance personal loans. These may include a credit check or collateral, but will offer a much lower APR than a payday loan.
- Local charity lenders: Some communities may have resources for low-income people or those in financial distress. These funds may be in the form of charity or a zero interest rate loan. They may be earmarked for specific uses like utility bills. If your community has these resources available, they can be a good way to get back on your feet without paying high interest rates.
- Friends and family: if you have the possibility to borrow money from a relative or friend, this can be another way to overcome a cash shortfall.
- Credit card cash advance: If you have a credit card with a cash advance option, you can get some money this way. This advance is generally at the highest APR for your credit card.
- Buy now, pay later: Apps like Klarna or Sezzle have made it easier to split purchases into four payments, and if you pay on time, there is usually little to no interest. Smaller payments may be more manageable than a lump sum and can help you get necessities.