Payday Loans Online Direct Lenders Only - How do They Work and How Much do They Cost?
Payday loans are a means for people who have a regular income, but who may have a poor credit history, to obtain cash, when they need it, fast. Typically, payday loans from direct lender are for amounts of less than $500.
However, cash advances can be one of the most expensive ways to borrow money. If the loan remains unpaid after the next payday, then additional finance charges are made, the loan is renewed, and the whole loan cycle begins again. After just a few months of this, the borrower can find themselves owing more in interest and charges than they owe for the principal amount of money originally borrowed.
Owing to the fact that legislation regarding short term lending is a mixture of state and federal law and it varies from state to state, nearly every state has a different set of rules governing this type of financial help. Payday loans are also known by a range of other names, including deferred deposits, cash advances, deferred presentment, and credit access.
Payday loans remain controversial and 18 states have effectively banned them. This type of personal loan is under constant scrutiny by the federal regulators too, who have branded these type of loans as being deceitful and potentially harmful to consumers.
The direct lenders, on the other hand, insist that their type of business provides access to much needed emergency cash to millions of hardworking, only, American citizens. Some consumer advocates have raised the issue that payday lenders profit when consumers are unable to repay their loan on time, which the advocates say, provides motivation for the lenders to encourage borrowers to overextend themselves, leading to a never ending cycle of debt.
This is why some financial experts advise people not to use payday loans at all, but to seek alternative lending means, especially if there is any possibility at all that they will be unable to repay the loan on time.
How do payday loans work?
Once they have confirmed your checking account and your income, a direct lender will be able to provide cash at a store in as little as fifteen minutes or, if the loan transaction is completed online, the money will be wired to your checking account, usually on the next business day.
In return for the cash advance, the lender will request either a signed check, or authority to withdraw the funds from your back account electronically, when the loan is due for repayment. The loan will be due for repayment on your next payday, which is usually in two weeks, or sometimes it may be a month.
If you obtain a loan at a store, an appointment will be made for you to return to the store when the loan becomes due. The store will remind you of the due date by telephone a few days in advance. If you fail to attend the appointment, the lender will cash the check, or withdraw the funds from your bank account. If you obtained your loan online, the funds will be automatically withdrawn from your bank account.
How much can I borrow with a payday loan?
There are thirty two states that allow direct payday lenders to operate and most of those states have imposed caps on the maximum value of loans allowed. The only states that do not have caps imposed are Maine, Utah, Wisconsin and Wyoming.
The lowest payday loan caps are in California and Montana, where the maximum is set at $300. The states with the highest caps are Delaware, Idaho and Illinois, where the maximum amount you can borrow with a payday loan is $1,000. Some states also have a rule that a payday loan can be no more than 25% of the gross monthly income of a borrower. Nevada and New Mexico have no fixed maximum cap on a payday loans, but they do impose a 25% of monthly gross income rule.
The caps do not necessarily mean that you will be approved for the full allowable amount. Online payday lender will take into account your income, your outgoings, and your previous payday loan history in determining the value of a loan that you may be granted.
The cash advance industry has reported that the average loan of this type is for $350 with repayment being due in two weeks.
What do I need to qualify for a payday loan?
The qualification requirements are typically some form of photo ID, documented proof of regular income, a checking account, and you will need to be 18 years of age or over.
A perfect credit history is not usually a requirement and some lenders do not need credit check.
Direct lenders online use specialised credit reporting agencies to check that you don't have any existing loans outstanding, you don't have judgements outstanding or wage garnishments against you, and that you don't have a history of bankruptcy or bounced checks.
It is possible that you could be rejected for a cash advance, even if you do meet the basic requirements. Here are some of the reasons why you might be rejected:
- You don't meet the lender's own minimum income requirement
- You don't satisfy the lender's own risk assessment criteria or the amount of the loan you require exceeds the percentage of gross income allowable by state law.
- You already have unpaid loans against your name.
- You are on active military duty. Payday lenders are prevented by federal law from making any kind of short term loan, with interest rates of more than 36%, to military personnel.
- You have recently been declared bankrupt
- You have a recent history of bounced checks
- You have not been in your current employment for long enough
- Your bank account has only been opened very recently
How much will a cash advance cost?
The cost of a payday loan will vary by lender and the by the state that you reside in. In the states that do allow short term loans, the allowable interest is typically capped at a maximum of between $10 and $30 interest for every $100 that is borrowed.
According to research carried out by the federal Consumer Financial Protection Bureau, the typical cost of a loan from a store based payday lender is $15 for each $100 borrowed.
Using that rate, if you were to borrow $350, which is the average amount of a storefront loan, in two weeks' time, you would need to repay a total amount of $402.50, which includes the cost of borrowing of $52.50
Payday lenders that operate online generally charge slightly higher rates and they sometimes claim that they are exempt from any state caps. The CFPB research showed that online payday lenders charge an average of $23.53 for every $100 borrowed.
The majority of cash advances, however, are extended, or rolled over. Of all the states that do allow payday lending, nineteen allow them to be rolled over. When this happens, the borrower will be charged a further two weeks of interest and is granted a further two weeks to repay the loan. The other states do allow back-to-back-lending, which is effectively the same thing.
Consumer loans are usually clearly marked with the annual percentage rate (APR) applicable to a loan and this indicates the total cost of a loan, including fees and interest. $15 per $100 on a two week loan, for example, would be shown as 391% APR.
Why APR matters
The APR on a loan is important, because it provides a way to compare loans on a like-for-like basis. The APR is not just the rate of interest; it also includes any other fees and charges applicable to the loan.
Will a payday loan affect my credit rating?
Many payday lenders do not use the three biggest credit agencies, Experian, Equifax and TransUnion, to check a borrower's credit history before making a loan, but nor do they report payments made on time, which would have otherwise improved your credit score.
However, if you fail to repay the loan on time, it is likely that the big credit agencies will be informed about it and that will damage your credit rating. The payday lender may not report a defaulted loan to the credit agencies, but the collection agency that takes over the debt probably will.
If a collection agency believes that here is a very good chance that they will be able to recover the money, it is likely that will defer reporting the default, because they can use that as leverage to encourage repayment. On the other hand, if they believe that there is little or no chance of recovering the money, they may report it immediately.
What will happen if I can't repay a payday loan?
In the event that you do not repay a payday loan, both storefront lenders and online lenders will first make efforts to collect the money themselves because they only receive a small portion of the loan if they refer it to a collection agency.
They will try to collect the money in two ways. Firstly, they will continue their attempts to gain payment for the debt directly from your bank account. If they can't withdraw the total amount due, some lenders will attempt to withdraw several smaller amounts. Every time an attempt fails, it could trigger more bank charges on your account.
At the same time they are attempting to withdraw money from your bank account, the lender will begin calling you on the telephone, writing to you, employing lawyers to write to you and, in some cases, they may contact the people whose names you gave as personal references.
Alternatively, a lender might make attempts to reach a negotiated settlement with you whereby you repay only a portion of the money that you owe.
If the lender is unable to collect the outstanding money themselves, they may then pass the loan onto debt collectors, and that could happen in just 30 days. A debt collector, or collection agency, will inform the credit bureaus and they may commence civil proceedings to recover the debt. A court judgement against you could lead to a garnishment of your wages and, or, seizure of your assets. Court judgements remain public for seven years.
What other options are there for fast cash?
If at all possible, friends and family are usually the best option, because they will offer the most favourable terms and be more flexible. This isn't always an option for some people, so other things to consider would be as follows:
Local community organisations: It may be possible to obtain a community loan from a local source to help with an emergency, rent arrears, or unpaid utility bills. Community organisations, churches and other not for profit organisations often grant small, low cost, loans to local residents.
Loans from a pawn shop: If you have any valuable items that you could use as collateral, you could raise some money from a pawn shop. You will usually get four months to repay the loan and, in the event that you can't repay it, the pawn shop will keep the items you pawned, rather than passing the debt on to debt collectors.
Forbearance of bills: Some creditors, such as utility and cable TV companies, will accept delayed payments and they don't charge interest. You could delay payment of some of these bills and use the cash you have saved to pay for your emergency.
Wages advance: Some companies will make an advance on your wages or, in a crisis, make small loans to employees.
Borrow money from your retirement accounts: IRA loans and 401(k) loans do have their risks, but they are a possible way of obtaining funds in an emergency. You are entitled to borrow from an IRA once every year, so long as you return the money within 60 days. Not all employers allow loans against your 401(k), but you if they do, you can borrow up to 50% of the balance or a maximum of $50,000. With a 401(k) loan, you will have five years to repay it, but if you fail to make repayments for 90 days, the loan will be treated as taxable income.
Draw cash from your credit card: If you have a credit card that is in good standing, you will be able to draw cash from that account, which would be cheaper than taking out a payday loan. Typically, you would pay an initial fee of approximately 5% for a cash advance on a credit card, plus the interest of approximately 30%.
Bank and credit union loans: As an alternative to payday loans, you could approach a bank or a credit union, some of which do offer short term cash advances. The cost of these types of loans may still be quite high, but credit unions cannot, by law, charge more than 28% APR for short term, small dollar loans.
Borrow against your life insurance: A life insurance policy that has a cash value might be a source of funds. You can usually borrow against a life insurance policy and then you would have the rest of your life to repay the loan. If you fail to repay the loan, it will be deducted from the final sum payable when you die.
Borrow online: If you don't qualify for the traditional type of personal loan, there are online lenders who provide instalment loans that will cost less than a payday loan from an outlet will. Some lenders will lend money to hourly paid workers on the day that they work.
Save up for emergencies: The simplest way to avoid the need for payday loans is to create your own emergency fund. Even just a few hundred dollars tucked away somewhere would help you cope with emergencies and you would only then be borrowing from yourself. It's the best way to break out of the payday loan cycle.
The alternatives to payday loans you should avoid
Payday installment loans: Often advertised as “no-credit-check instalment loans", these types of loans are available in stores and online and they usually require that you meet the same requirements as a standard payday loan. These extended, instalment payday loans can be very expensive. If you took out a $2,000 loan over three years at 400% APR, you would end up paying back a total of more than $16,000.
Auto title loans: In states where they are legal, auto title loans are often compared to payday loans, but the difference is that you use the title to your vehicle as collateral on the loan. The interest rates charged are similar to those on payday loans, but, if you don't repay an auto title loan, the lender will seize your car.