What Is a Payday Loan?

Unforeseen financial emergencies can be stressful, especially when you’re in need of quick extra cash immediately. Luckily, with simple and easily accessible loan solutions, like payday loans, you may be able to get rid of your financial burden in less than one hour.

Payday loans may offer instant financial protection to those who may not have the most promising credit history or those who aren’t willing to tangle themselves in traditional bank loans. Read on and learn about the conditions and requirements of a payday loan and find out whether it’s the right financial solution for you. 

Payday Loan – What Is It?

Payday loans, also known as payday cash advance loans, are one of the popular short-term loans right next to the common payday loan alternatives, such as title loans and installment loans. They are specifically structured for people needing immediate cash influx to cover unexpected expenses.

One of the most significant features of a payday loan is that it charges a high-interest rate which is typically due to the convenience and lower credit standards.

This kind of short-term loan is normally based on how much you earn – it is typically a portion of your next paycheck. You usually have to provide a pay stub when applying for a payday loan. 

How Do Payday Loans Work? 

Once you’re approved for a payday loan, you will be required to complete some basic documentation. Typically, the paperwork can be completed online from the comfort of your home, which makes the entire online payday loan process quick and hassle-free. This way, you can get a payday loan online in a quick and easy way without having to go through a time-consuming loan application process typical for traditional banks.

Your loan repayment terms will vary depending on the lender and the amount of your loan, but some lenders will expect you to repay your entire loan balance with interest within two to four weeks. 

For example, if you borrowed $400, your lender can set up an auto-draft loan payment from your bank account to repay $440 (the original principal and interest fees) two weeks later. If you borrow larger loan amounts, you may be subject to automatic payments every two weeks until your loan is fully paid off. In some exceptions, you may be able to mail in your loan payments, however, this is not a standard procedure. 

Pros and Cons of Payday Loans

Online payday loans can often be a suitable solution for your short-term financial needs. Although they have many benefits, there are also some disadvantages that you should be aware of before deciding to apply for a payday loan. 

Pros

• The application process is fast and simple. While regular banks can take from several days to even weeks to complete the entire loan application process, a payday loan application can often be finalized in less than one hour. What’s more, many online lenders provide simple online application procedures, which make the process quicker and more convenient for the borrower. 
• You receive funds quickly. As soon as you’re approved for a payday loan, you can expect to receive your funds typically within 1 to 2 business days. This is particularly helpful if you need some extra cash ad hoc. 
• A low or no credit check is required. Many payday lenders won’t require you to have a high credit score to qualify for a payday loan. Some of them may not even run your credit history at all. Therefore, borrowers with poor credit scores or credit difficulties can still qualify for this type of loan as long as there are no radical issues involved, such as bankruptcy or defaulted payday loans with another payday lender. 

Cons

• High interest rates. If you’re borrowing a more significant amount of money (for example, in the triple digits), your loan can quickly accumulate a lot of interest which may cause you issues with repaying your loan or making your regular life payments. If you don’t want to get yourself in a situation where you have to continuously renew your loan agreement to pay your routine bills, make sure you are able to repay your loan on time out of your next paycheck.
• Short repayment terms. A payday loan is typically due to be returned within one to four weeks. You should plan to repay your loan within that time frame to minimize fees and interest charges. 

What Are the Requirements for Getting a Payday Loan?

Payday loans are commonly regulated by state laws, which means lenders are obliged to follow the guidelines given by the states they operate in. For this reason, requirements for getting a payday loan will vary depending on the lender and the state. 

Still, there are several basic points that lenders require from borrowers in order to qualify for a payday loan. These include:

• Age. All borrowers must be at least 18 years of age to be legally eligible to take out a payday loan. 
• Active checking account. Most lenders typically operate on online banking payment and will want to direct deposit your loan funds into your bank account. Many lenders will also require your loan repayments to be auto-drafted from your account.
• Proof of income. Although income requirements will vary depending on your location, lenders will want to see a document proving that you are financially able to repay your loan when it’s due. While your income doesn’t have to be from a traditional job, it needs to be a consistent and recurring income. 
• Personal details. You will need to provide your personal information, including your contact phone number, stable home address, and email address. Those details are necessary for the lender to contact you in case you fail to make your payments on time. You may also be asked to provide contact information for your references. 

Before Applying for a Payday Loan

Payday loans offer an easily accessible and quick influx of funds which makes them increasingly popular. However, as they are so simple to get, many borrowers don’t do proper research before applying for payday loans, which has caused some negative stigma around them. If you’re thinking about taking out a payday loan, there are some important steps you should take before applying to make sure the loan is a good fit:

1. Choose the right type of loan. Payday loans are a specific type of financial borrowing, yet some companies offer products called “payday loans” that don’t truly match the criteria of such borrowing. For example, some lenders may ask you to provide collateral to secure the loan, which may create a potential risk to your personal property. With that being said, you should always familiarize yourself with the specifics of your loan before applying.
2. Consider other options. Although payday loans are quick and simple to get, they aren’t suitable for every borrower as they are short-term and have high-interest rates. If you need an instant influx of cash, you might also want to consider some other options, like using credit cards, getting another job, or asking a friend or family member for financial support.
3. Check the lender’s requirements. Although basic conditions for a payday loan are pretty standard, they may vary depending on the lender. The lenders may have different requirements for proof of income, credit scores, loan amounts, and repayment terms. Before applying for a payday loan with a particular lender, make sure you are familiar with their specific requirements, so you know they meet your loan needs. 
4. Educate yourself on your state laws. The Attorney General in each state can place specific regulations or limitations on payday lending or even disallow it entirely. These state laws are regulated to prevent predatory lending practices, which, for example, take advantage of families with low income. Payday lenders must abide by these statutes. Therefore, it’s crucial that you educate yourself on them and verify that your state-licensed lender complies with any relevant state laws. 

Payday Loan FAQs

Can my loan application get declined?

Yes, in some cases, you might get rejected from applying for a payday loan. Although the requirements for this type of loan are more relaxed than with other loans, lenders can still deny applications when they consider the risk of default on loan to be too high. Your loan application might be declined for such reasons as:

• You are unemployed or your income is too low. Lenders may decline your loan application if your income isn’t enough to cover basic living expenses, as it can indicate that you won’t be able to repay the loan.
• You already have a payday loan at another company. Most states limit borrowers to a single payday loan outstanding. In some states where it’s possible to take multiple payday loans at the same time, borrowers are usually limited to $500-$1000 in loans at a time. 
• You have too many outstanding debts. Lenders will likely look at your current debts to determine your ability to repay your payday loan. If you have too many debts with too little income, lenders may deny your application. 

How much can I borrow?

The amount you can borrow varies according to your state’s laws and your income. The average loan amount you can borrow is $375. In most states, the payday loan amount ranges from $100 to $1,000. 

The sum of your loan depends on the lender and will be determined after considering your application. If you have taken out and repaid payday loans in the past, you will be able to borrow a higher amount for your next payday loan.

Can I get a payday loan with bad credit?

Yes. There are many factors that lenders pay attention to when evaluating your eligibility for a payday loan. Your credit history won’t make a significant impact on your loan application, and you will still be able to qualify for it. 

However, bear in mind that some lenders may decide to provide you with a more expensive loan due to your poor credit score, and you may also have fewer options to choose from in terms of your loan agreement. 

The Bottom Line

A payday loan is a type of short-term and high-interest loan structured for people who need quick and easy extra cash to cover unpredicted expenses. They can be a valuable aid in the most critical moments as long as you’re taking advantage of the correct lending options and are aware of the risks they may carry.

As they may often feature very high-interest rates, payday loans should be used for short-term money needs rather than as a long-term financial solution. If you’re experiencing difficulties with your credit score, the best idea is to seek credit counseling which may help you solve your financial problems.