Most payday lenders don't check credit and can deposit $1000 cash into your account over night. Sounds great, right? So what's not to like?
The catch is these loans cost a boatload and not all payday lenders are the same. Be careful and make sure you understand what you are getting into before taking a payday loan.
Here are five key things to know before taking one of these loans:
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It's better to wait and skip the loan.
Payday loans are very expensive. Rates are usually based on a flat fee per $100 and can range from $15 to $45. So although it may sound cheap to get $100 now and pay $115 later this is not cheap. This is crazy high compared to other loans like credit cards where the equivalent payback on a two week loan would be $0.61. That's right $0.61 vs $15.00. Payday loans are expensive because they are super convenient and expensive to provide; they rarely make economic sense for a consumer.
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Your checking account is debited on payday.
Payday lenders get paid first. Instead of lending money based on credit history they lend money based on the ability to get paid first. They require direct access to your checking account. This means that the moment a paycheck arrives they immediately withdraw fees and principal.
This process is pretty clear upfront so it's not deceptive but it can really add up in fees if you don't have enough money in our account when they try to withdraw funds. They will often try multiple times in one day until they get paid meaning you can get multiple "bounce check" fees. This means that in addition to the $15 you owe the lender you may end up owing your bank another $50 in fees. Make sure you have enough money in your account when the loan is due.
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Payday loans are due in full on your next payday.
Payday loans are due in full on payday. This means a $300 advance with $30 in fees per $100 today will make your paycheck $390 lighter come payday. This is a lot of money so make sure you can manage your expenses to be able to pay off the entire loan at payday.
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State licensed lenders are generally safer.
Not all lenders are the same. Many online lenders are largely unregulated operating outside of the US. This includes offshore lenders and tribal lenders. This makes it very difficult if things go wrong. Remember you have given the lender access to your checking account. State licensed lenders are regulated lenders. These lenders are licensed by states and must follow regulations regarding collections and loan renewals or risk losing their license.
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An installment loan may reduce costs.
Payday lenders may offer a renewals but remember you will be paying fees on fees. A $300 loan with $30 in fees per $100 will make your paycheck $390 lighter at your next payday but if you roll it over one payday it will cost you $507 on the second payday. This means $300 borrowed is now costing $207 in fees after two paydays. The difference between installment loans and payday loans is that repayment is spread out over a longer period of time. These loans are still expensive and rarely make economic sense so only take one if it's necessary.
Short term loans can help in a bind. They don't require good credit and get cash into your checking account over night but these loans, whether it's an installment loan or a payday loan, are expensive. It's always better to wait until payday instead of taking out a loan if one can wait.
If it's an emergency and cash is needed then we prefer to go with a state licensed lender. If you can pay your loan back in full at the next payday a payday loan may be a good option. If you cannot pay it in full then an installment loan may be a better option. See payday or installment loans for additional information.