Payday loans are designed to be used in financial emergencies, when you lack enough money to pay pressing costs such as rent, home repairs, or medical bills.
Payday loans should, however, only be approached as a short-term loan solution. As one of the priciest means of borrowing, these loans generate huge amounts of interest, which means that the cost of borrowing is high.
Payday loans should only be taken out when absolutely necessary, and paid back at the earliest opportunity, to prevent accumulating greater debt in the form of high interest repayments.
- Payday loans are usually taken out when borrowers are hit with unexpected costs, such as a hospital bill, or unexpectedly having to replace a car part.
- In 2021, the average US payday loan borrower requested a loan of $375.
- Payday loans bear interest of around 400%, making them an expensive means of borrowing.
- The average loan in 2021 was $375.
- Payday loans are authorized in 37 American states, including California and Texas, but are banned in 13 states, such as New York and Maryland.
What Is A Payday Loan?
Payday loans are short-term loans granted to borrowers who need financial support when they cannot meet their financial demands.
It is not unusual for a car part to break, to encounter an unforeseen medical or dental bill, or that you need to urgently fix your heating at home. It happens every day, and for some, the money required to pay the associated bills is out of their financial reach. It is at times like these that payday loans are there to help.
If you choose to apply for one, you should only request what you need and pay it off as soon as possible. Remember, these loans are accompanied, on average, by interest rate of 400%, meaning they are not a cheap means of borrowing.
It is also important to note that payday loans should only be used if truly needed. If you have money in the bank, but are simply reluctant to spend it, think again. Taking out a payday loan will work out more expensive than parting with funds you already have.
Who Uses Payday Loans?
The majority of borrowers fall between the ages of 18 and 24, but there are plenty of older borrowers too. In fact, around 12 million Americans borrow payday loans each year, and 25% of those 12 million have never taken one out before.
So, never feel alone if you find yourself in need of financial help; it’s incredibly common!
What Would I Use A Payday Loan For?
While the needs of each borrower are unique, and there could be some more obscure reasons as to what you would use your funds for, there are a few recurring costs that borrowers need money to cover. These include, but are not exclusive to:
- Urgent household repairs, such as electricity work, plumbing work, or fixing the heating.
- Paying off medical, dental, or veterinarian bills.
- Repairing your car or replacing a car part.
- Paying your rent.
- Covering funeral costs.
What all of these costs have in common is that they may need to be paid right away, and that is why payday loans are a popular avenue to turn to. Payday loans can provide you with the same day funds you need to fix your boiler within one hour.
These costs also have the common trait of being urgent, and that is why payday loans are turned to. These loans should not be taken out for frivolous or impulse spending.
This type of loan should not be used for any unnecessary spending and should not be used to pay off alternative debts.
How Much Can I Borrow Through A Payday Loan?
Borrowing limits will range from state to state, as some states such as Alabama and California cap how much you can borrow, at $500 and $300 respectively. Indeed, states such as New Mexico or Georgia prohibit payday loans, meaning you are unable to secure a payday loan of any amount.
Typically, payday loans range from $300 to $1000, with the average loan being $375. When taking out a payday loan, you should ensure that you aren’t being offered more funds than is legally approved to borrow in your state.
How much you can borrow will also rest on other factors, such as your credit score. Your credit score reflects your financial behavior and tells a lender whether their money will be in good hands. While many lenders won’t take your credit score into account, for some lenders, they will be more willing to lend to those with a credible past.
How Do I Apply For A Payday Loan?
Payday loans are a breeze to apply for, as lenders only need a small amount of personal information. The details you will need to provide include:
- Valid identification, such as a driver’s license.
- Your employment status
- Your income
- Your date of birth, as you must be 18+
- How much you wish to borrow
- Your address
- Contact details
Sometimes, prospective lenders will carry out a credit check, meaning they assess your financial history. If you have had a rocky financial past, don’t fear! Plenty of lenders are committed to providing loans to borrowers like you, and some won’t even refer to your credit history.
How Do I Repay A Payday Loan?
Typically, borrowers pay back their payday loans two weeks after taking them out. This is usually because they will have been issued their next paycheck, meaning they can afford to pay off their debt.
With a payday loan, the sooner you pay it off, the better. This is because the interest on them is substantial, and so the longer you leave it, the more expensive it is. When you take out a loan, you will enter a repayment contract. You may choose to pay it all back at once, or spread your repayments over a few weeks or months.
In theory, you have up to 60 months to pay off your loan. Again, this will depend upon your state’s regulations, as many states, such as Tennessee limit how long you may borrow for.
Failing to repay your loan as agreed can land you with late fees, threatened legal action, and damage to your credit score.