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What is the True Cost of Payday Loans?

What is the True Cost of Payday Loans?

A payday loan is a short-term loan with high fees for a small amount, usually $500 or less, which must be repaid with the borrower's next salary. Payday loans only require ID, income, and a bank account and are usually given to people with little or no credit.

Financial experts warn against payday loans, especially if the borrower may not be able to repay the loan immediately, and recommend other loan sources.


How do payday loans work?

A payday lender will authenticate your income and checking account information and offer you money directly or, if the transaction is done online, to your bank account on the same day.

In exchange, the loan lender will ask for a signed check or permission to withdraw money electronically from your bank account. The loan expires immediately after the next payday, usually two weeks, but sometimes in a month.

If the loan is issued in a store, you can repay it on or before the loan expires. If you do not show up, the lender will write the check or charge the loan amount plus interest. Online lenders use electronic withdrawal.


What is the true cost of a payday loan?

According to the Office of Consumer Financial Protection, the cost of a loan from a payday lender is typically between $10 and $30 for every $100 borrowed. If a payday lender charges $15 for a $100 loan for two weeks, that's 391% APR.

If the loan is not fully repaid on the first day of payment, a fee is added, and the cycle repeats. Borrowers may pay more interest than the original loan amount within a few months.

This is why payday loans are risky - it's easy to get stuck in a cycle of debt, and it's expensive to get out of it.


How much money can I borrow with a payday loan?

The amount you are eligible to borrow varies depending on state law and your finances. Most states that allow payday loans have a limit of $300 to $1,000. Check your state's loan status.

This does not mean that you will be approved for the maximum amount allowed by law. A payday lender may consider your income when deciding how much you can borrow. However, other payday lenders may not assess your ability to pay or other obligations, putting you under a financial burden.


Does paying back the payday loan help you build credit?

Paying off a payday loan generally does not build credit. Most payday lenders don't report timely payments to credit bureaus, so the loan can't improve your credit score.

However, if you don't repay the loan, your credit may be damaged. The lender can report the default to the credit bureaus or sell the debt to a collection agency, which will affect your score.


What do I need to get a payday loan in advance?

To qualify for a payday loan, you usually need an active bank account, identification, and proof of income, such as a paycheck. You must be at least 18 years old. Some creditors also require a social security number.

You can still be denied a payday loan, even if you have an income and a bank account. Creditors who charge APRs above 36% are not legally allowed to lend to military personnel, their spouses, and family members.


What if you don't repay your payday loan?

Since most lenders don't report your loan to the credit bureaus, it's okay if you can't repay the loan, right? Not really.

Although the creditors themselves won't report the debt to you, they can sell the debt to a collection agency. Collection agents report to the three credit bureaus. They are also known to be ruthless when it comes to pursuing debtors.

A collection agent will call you and send you an email requesting payment. Fortunately, the Fair Debt Collection Practices Act (FDCPA) limits how debt collectors can reach you. For example, they can't call you late at night or early morning hours.

The FDCPA also prohibits harassment and limits where debt collectors can contact you. They can't follow you to work if they know they can't contact you there.

Even if your creditor doesn't sell you the debt to a debt collector, the fees that add up can create a huge burden for you. Some lenders also threaten to sue if a borrower is late on a payment.

Paying off debt or negotiating a lower payment can help you finally get out of your payday loan cycle.


Bottom Line

When it comes to payday loans, the buyer should be careful. If it sounds too good to be true, it probably is.

Before accepting a payday loan, do the math to see exactly the interest rate.


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