A Guide to Payday Loans: What are They and Who Qualifies?
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2.5 million people take out a payday loan every year. Yet this number is declining.
Payday loans have a questionable reputation. With statistics like 80% of loans roll over within 30 days, that’s no surprise.
Borrowing from a payday lender doesn’t have to be scary, though. You just need to understand the risks and how to mitigate them. Part of that is knowing what payday lending is and whether you can apply.
Want to know the payday loans definition and if you qualify? Keep reading for the answer to those questions and more.
Payday Loans Definition: What is a Payday Advance?
Payday loans are short-term, high interest advances for people in desperate need of cash. They’re referred to as “payday” because the loan repayment is typically due within 2-4 works or on your next payday.
Though a payday loan varies depending on the lender and your needs, they generally share a few things in common:
- Loans range from $50-$1000
- There’s no credit check
- Loans are usually repaid in one lump sum
For some people, a payday loan may be the only option. But for others, they can be a serious risk.
Are Payday Loans Risky?
You’ve probably met someone who shudders in fear at the mention of payday loans. That’s no surprise when 20% of people default on their loan, which reflects negatively on credit scores.
But payday loans don’t have to be scary. As long as you understand the risks and have a strategy to mitigate them, you can successfully take out and repay your loan without a problem.
To set yourself up for success, make sure to factor in the total cost of the loan. Not just the amount you’re borrowing. Payday loans have extremely high fees associated with them since they are so convenient.
For example, you may be required to pay anywhere from $10-$30 in fees per $100 borrowed. That means the total cost of the loan is $110-$130. And that’s just if you borrow the minimum $100.
When you consider that the APR of a payday loan is 400% or more on average, a 12-30% APR credit card may be the better option for you in the long run. Do remember, though, that you have to undergo a credit check when applying for new lines of credit. This can damage your score further if it’s a hard credit check.
Who Can Get a Payday Loan?
The good thing about payday loans is that almost anyone can be approved. When applying for new credit cards and unsecured loans can seem like jumping through hoops, a payday loan is a breath of fresh air.
Here’s what you need to know about getting approved for your payday advance.
1. Those Who Qualify
While you won’t have to go through a credit check, there are still a few things you need to qualify for a payday loan.
Most borrowers require a government-issued ID. You’ll need a checking account that is in good standing with your bank. That means you can’t produce a false account or one that is in delinquency.
Finally, you need a steady paycheck. While lenders rarely check out your ability to repay the loan, you will default if you don’t have some money coming in. A pension or Social Security check can also be beneficial for payday borrowers.
2. People with Little or No Credit
Just because you qualify for a payday loan doesn’t mean you should get one. If you have other lines or credit or savings at your disposal, it’s better to avoid the risk and go with an alternative option.
But for those who have poor or no credit and can’t get a traditional loan or credit card, payday loans may be the only option.
3. If It’s Legal in Your State or Province
In the US, payday loans are only legal in 32 states. But these states cap the loan amount, the fees, and the total cost of the loan.
If you live in Canada, though, payday loans are legal in all provinces and territories. There are limits to how much you can borrow and other factors, though.
For instance, Ontario laws require:
- A maximum of $15 in fees for a $100 2 week loan
- A lender to give a borrower 2 business days to cancel the loan
- No extensions or rollovers
- No direct bank transfer forms
Ontario also has laws about the frequency and manner in which a lender can contact you for repayment. If you’re looking for loans Ontario, Captain Cash in Toronto is an excellent option.
How to Get a Payday Loan
Now that you know the payday loans definition and whether you qualify, here’s how to get a payday loan.
In most states and provinces, you can get a payday loan from a storefront, a bank, or online. When you apply for an advance from a payday lender, you’ll bring your ID with you.
Next, you’ll speak with the loan provider about how much you need to borrow. Some states cap the maximum amount you can borrow but, barring state laws, a lender will typically give you what you ask for.
Once you’ve signed for the loan, you will decide how you want to repay it. Here are your options:
- Write a postdated check for the lender to cash
- Bring a check to the lender on your next payday or pay online through the lender’s website
- Provide a bank account and have the amount directly debited
If repayment day rolls around and you still can’t pay, you can ask for a rollover loan. This means you only have to pay monthly fees until you can pay the initial loan amount on the new due date.
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