Payday Loan FAQs

Payday loan: What's it?

A payday loan is a small, short-term cash loan designed to help a borrower cover unexpected expenses until his or her next payday. This loan is also known as payday advance, paycheck advance or cash advance. The amount a borrower can take out varies widely from lender to lender and from state to state, ranging form $50 to as high as $1800. The loan is normally due on the borrower's next payday from 7 – 45 days.

Requirements for the loan are minimal and most people can qualify for it. To qualify for the loan in the U.S., for example, a prospective borrower only has to be 18 or older, employed or have other source of income, have an active checking account and a phone number.

How does it work?

Payday loans are attractive because the application process is simple, and borrowers can get the cash they need very fast. This applies for both online and offline transactions.

Offline- Retail store

Fill out a one-page application form and return it to the cashier along with a void blank check and your pay stub. The cashier will verify your application information and within minutes approves your loan request. You will then be asked to sign the loan agreement and provide an identity. If everything is fine, the cashier pays you the approved amount in cash.

You can pay back your loan by returning to the store before the due date and paying cash for the loan amount plus finance fee and retrieve your blank check. A second repayment option is to allow the lender to automatically withdraw the amount due from your bank account on the due date.

Online

The online process is similar to the offline process. Simply, log on to a lender's website and fill out a simple application and submit. If you meet the requirements, your application is approved instantly. In states where no documents are required by law, the lender may not ask you to fax your pay stub or latest bank statement. If, however, state law requires payday lenders to obtain a borrower's pay stub before approving any loan request or your application information could not be verified by the lender, you may be asked to fax certain documents.

Once you complete the application process, the lender will deposit your cash directly into your checking/savings account by next business day. Some lenders may offer to transfer your funds within a few hours (same-day payday loan) after approval is granted. On the due date, the lender will automatically withdraw the loan amount plus finance fee from your bank account. And, that completes the transaction and closes your loan account.

What are the charges like?

Payday lenders charge a flat fee known as finance fee. Many US states set the maximum amount a payday lender can charge for their loans. Currently, the finance fees for payday loans range from $15 - $30 per $100 borrowed for 14 days. If you need more time to pay your loan, you may be charged additional fee for loan extension or rollover.

Other charges include non-sufficient fund (NSF) fees for unpaid checks. If your account is past due, your lender may trigger collection procedures. In that case, you may be responsible for legal fees and other costs related to collection activity. Payday lenders are required by laws to disclose all charges in their loan agreement and other disclosure documents.

What is APR and how is it calculated?

APR stands for Annual Percentage Rate. This is the interest rate a borrower pays on his or her payday loan over a 12-month period. Federal law requires payday lenders to express the finance fee they charge on their loans in the form of interest rate. The purpose of this is to compare the cost of payday loans with other loans.

APR is calculated by multiplying the number of payments by the interest rate. For a loan of $100 for 14 days with finance fee of $15 would have an APR of 390%. This is because this loan has a 26 payments and an interest rate of 15% if it were held for 12 months.

What is rollover?

Payday loan rollover is simply a repayment option offered by some lenders which allows borrowers to use the proceeds of a new loan to pay off an existing loan. This is also known as refinancing. To extend your loan, you must contact your lender before the due date of your loan. If approved, your account will be subject to additional charges.

Whether or not you can roll over your loan and how many times you can do so in a year depends mainly on your state of residence. In the US, payday loan industry is primarily regulated by states. In many US states for example, borrowers are not allowed to roll over their loans. In states where it is allowed, the number of times you can do so is severely limited. Another factor that affects your ability to roll over your payday loan, albeit to a lesser extent, is the policy of specific payday lenders. Some lenders simply do not offer such repayment option to their customers.

How is the industry regulated?

Although payday loan industry in the US is regulated by state and federal laws, it is state laws that regulate the bulk of its lending practices. For example, each state determines whether or not payday loans are permitted, sets the terms under which loans are to granted, specifies collection methods a lender can employ if a borrower in unable to pay, etc. These restrictions apply to both online and offline lending.

The federal regulation of the industry involves disclosures. All payday lenders are required by federal law to clearly state loan terms in their loan agreement, so that borrowers are aware of what they are responsible for on the due date. The new financial system reform bill may also play some role in regulating non-banking lending practices.

Do payday lenders report to credit bureaus?

Payday lenders in the US do not report to the credit agencies nor do they require credit report for loan approval. In the U.K., however, some lenders report payment history and other relevant information to credit agencies. So, taking out a payday loan in the U.K. has an additional benefit of helping a borrower rebuild or build good credit.

Is a customer's personal info kept confidential?

Whether or not your personal information as a payday loan customer is confidential depends largely on the lender's privacy policy. Some lenders share their customers' personal information with sister companies and third parties. In some cases, such companies provide opt-out option which allows their customers to limit how much their personal information can be shared.

The confidentiality of your personal information online also depends on how secure the lender's website is. Most reputable online lenders equip their websites with security encryptions, which protect their customers' personal information against hackers and other Internet criminals.

As a customer, you can also take certain steps to further protect your personal information. For example, choosing a state-licensed online direct lender can make all the difference in the world when it comes to securing your personal information. These lenders are more likely to comply with laws in your state of residence as well as invest time and other resources needed to protect your personal information than an offshore lender or a loan broker.

When is a payday loan right for me?

Payday loans are designed to help borrowers cover emergency expenses that can't be put off for a while. So, a payday loan may be right for you if:

These reasons and many more like them can justify taking out a payday loan.

How do I apply for the loan?

The application process for payday loans is simple and, in most cases, hassle-free. It takes just a few minutes to complete online and offline. Here is how to apply.

Offline

Fill out a one-page application and sign it. Return it to the cashier along with a copy of your pay stub and a void check. The cashier will verify your application information by entering it in their system. If the system approves it, you will then be asked to sign a loan agreement. Finally, the cashier will pay you the loan amount in cash.

Online

Visit a payday lender f your choice. Fill out a 2-minute application and click the "submit" button. In many cases, it takes just a few minutes for the lender to approve or decline your loan request and this will be communicated to you via email. If approved, you will receive a loan agreement from the lender. Sign and return it to the lender. Finally, the lender will deposit your cash into your bank account within 24 hours after approval is granted.

Do I have to sign a loan agreement online?

All payday lenders require borrowers to sign a loan agreement stating that they accept the terms and conditions under which their loans are granted. By signing this document, a borrower becomes legally responsible for the repayment of the loan he or she is receiving.

Lenders are required by law to clearly state everything a borrower should know in their loan agreements. This way, borrowers are not surprised by charges they are not aware of. Important information found on a typical payday loan agreement includes finance fee, APR, due date, loan amount, total amount due, collection method, etc.

To protect your financial future, it is vitally important for you to read a loan agreement carefully before you sign it. Unless you rescind the loan in a timely manner, once you sign the loan agreement, you are primarily responsible for the loan. So, take time to read and understand the agreement before signing it.