Today’s payday loans have historical roots dating back to the 5th century. Although these historic loans differed from those we use today, they featured the same general idea.
Today, payday loans are more popular than ever. Despite their rising popularity, many people still have questions about these loans.
How do payday loans work? Who is eligible to receive them? Continue reading to learn everything you need to know about payday loans before applying for one.
How Do Payday Loans Work?
A payday loan is a short-term, high-interest loan. As the name suggests, they’re meant to help people who need money before their next payday.
During the application process, you’ll need to supply proof of income and a checking account number. These will both be verified by the potential lender. You will also need your social security number and a state-issued ID.
If applying in person, you should receive a decision on your loan within about fifteen minutes. It doesn’t take much longer for the money to be deposited into your bank account. Some lenders have an option for the loan to be made in cash.
If applying online, you should receive a decision almost immediately. The money typically isn’t deposited into your account until the following morning, however.
To make sure you can pay back the loan, you will need to do one of two things. At a store, you will be required to sign a check for the amount of your loan. Online, you’ll need to permit an automatic withdrawal from your bank.
Your loan is typically due on your payday. Some lenders allow you to wait two weeks to a full month before paying back your loan. Make sure to ask about your repayment options before agreeing to the loan.
What is Required to Get a Payday Loan?
To be approved for a payday loan, you will need to make at least $500 a month in guaranteed income. Income doesn’t have to come from a job. It can also be in the form of disability, social security, or any other income source.
You will also need a state ID and social security number. Payday loans are only available to adults over the age of eighteen. Even if a sixteen or seventeen-year-old has a job, they can’t receive a payday loan.
Why Might You Not Be Approved for a Payday Loan?
Not everyone is approved for a payday loan. A few reasons you might not be approved include:
- You don’t make enough money
- You don’t have an active checking account that’s been open at least one month
- You have recently filed bankruptcy
- You don’t live in the state where you are applying for a loan
- You’re active military
- You have other loans out (including student loans, in some cases)
If any of these situations apply to you, that may be the reason you aren’t approved for a payday loan. It’s important to note federal law doesn’t allow the active military to receive short-term, high-interest loans.
What Fees Should You Expect?
The fees charged on payday loans will vary between lenders. The national average is between $15 and $20 in fees per $100 borrowed for a two-week loan. The prices for a monthly loan are usually a little higher.
If you borrowed $500, for example, you could expect to pay an extra $75 to $100 in fees. The fees are added to the amount you borrowed. The total amount you’d need to pay back in this scenario would be $575 to $600.
If you’re unable to pay, those fees are charged a second time. If the loan was due after two weeks, but you couldn’t pay you will be charged another $75 to $100 in fees.
How Much Can You Borrow?
The amount you can borrow will depend on two factors. The most obvious factor is your financial health. You won’t be allowed to borrow more than you can reasonably pay back on your following payday.
Each state will also have its own set of laws on how much a person can borrow. In both Kansas and Missouri, the legal maximum is $500 for payday loans. If you earn enough, this would be the total amount you’re allowed to borrow at a time.
Who Should Get a Payday Loan?
Payday loans are typically meant for use in emergencies. They are a good option if you need a little money to pay rent or utilities on time, for example. Or, if you need to replace a tire but don’t have savings to cover the costs.
A payday loan isn’t meant to be used in place of other loans. These types of loans wouldn’t be useful in place of student loans, mortgages, or car loans.
A few situations where a payday loan might be right for you include:
- You need a few bucks to cover rent or utilities
- You need a minor vehicle repair (like a new tire or brake pads)
- You need a minor home repair (like a new faucet or door locks)
- You need grocery money today but don’t get paid for three days
- You need money to cover medical co-pays in an emergency
In short, payday loans are appropriate for people who need a small amount of cash quickly. These loans are ideal for people who don’t have other borrowing options, such as close friends or family members.
Do You Need a Payday Loan?
Payday loans are great options for people who need a small amount of money quickly. They aren’t alternatives to other loan types, and not everyone qualifies for them.
Now you know the answer to “how do payday loans work?” If you need a payday loan, contact us today. We’d be more than happy to assist you with your short-term financial needs.