FAQs About Payday Loans

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Applying for credit can be a stressful process especially if you are not familiar with the ins and outs of how financial products work. If you want the answer to a simple question about taking out a payday loan you will be able to find it here, in our FAQs about payday loans.

The article sets out a list of the most frequently asked questions relating to payday loans and you can either read through all of the answers or go directly to the section that is most relevant.

Basic FAQs about payday loans

What is a payday loan?
Basically, a payday loan is a very short term loan for a small amount of cash. Designed to be used in an emergency, a payday loan is repaid when your next paycheck arrives. Payday loans are also listed under other names. You may see advertisements for a cash advance, payday advance, payroll loan, small dollar loan, salary loan or short term advance. All of these are types of payday loans and the lenders may operate from storefront premises or have a financial website.
Are payday loans legal?
Payday loans are legal in 38 states. Each state has its own regulations and laws pertaining to this type of loan. There is a wide variation of rules with some states capping the amount of a loan and others capping the interest rate that can be charged by lenders.

Ethical loan companies also follow the best practice recommended by the Consumer Financial Protection Bureau. This requires responsible lenders to ensure that borrowers do not take out a loan if they are unable to afford the repayment.

What is the difference between using a store and an online lender?
Most lenders who operate out of storefront premises also have an online presence. So, you can choose to go to your local store and personally receive the money or you can apply online and receive the loan funds directly into your checking account.

If you choose to visit the store the application will take around 15 minutes and you will walk out with the cash. Using an online application takes a few minutes and you have the advantages of convenience and anonymity.

Online lenders are open at all hours and you can complete the application in the comfort of your own home. Additionally, no one you know will ever see you applying for the loan so confidentiality is guaranteed.

Am I eligible for a payday loan?
In order to be eligible for a payday loan you will need to provide certain documents. These include personal identification like a driving license or passport. The lender will also ask for proof of your income.

Depending on the payday loan regulations which apply in your home state, you may be able to apply for a loan if your income is a social security payment or disability benefit. Borrowers who are employed will need to produce their last paycheck.

All store applicants also need to bring a bank statement proving that they have a functioning checking account and a personal check made out for the loan amount plus the fee. The lender retains the check until repayment is due.

Online applications are slightly different but still require proof of identity and income. Documents can be uploaded and forwarded to the lender and no personal check is required. The funds are forwarded directly into the checking account.

The eligibility criteria for taking out a payday loan is fairly standard between all lenders but some may require more proof than others so you need to check out your chosen lender for more details.

How can I choose between lenders?
Storefront lenders

This is a tricky question and depends upon where you live. Because the regulations for payday loans in the US are so complicated, if you want to be certain about the legality of the loan, you are going to be restricted to lenders which are licensed to operate in your home state.

Lenders who have stores also have staff who are trained to provide information and advice about loans. So, if you are unsure about where to go for help, a local lender might be the best place to start. Local lenders must be licensed by the state authorities and must abide by the state and federal laws for payday loans.

Online lenders

There are also hundreds of online lenders offering loans to anyone, anywhere. But, many of these are rackets or are operating illegally. Of course, not all online lenders are scams and many are legitimate businesses but if you are unsure about using a particular online lender there are a number of precautions you can take.

Firstly, make sure that the website is legitimate by checking the reviews from previous customers, the address which should always have the prefix ‘https’ and also look for the small padlock icon which means that it is a secure site. Responsible and legitimate lenders will advertise the loans with an APR and most of the large lenders have a live chat function or a customer relations helpline.

The large lenders will also provide a series of FAQs and will fully disclose the terms and conditions of the loan in simple straightforward language. Remember that the interest rate is not always the most important factor when applying for an online loan. It is also important to make sure that you are fully aware of the fees and charges that apply both for loans paid back on time and those that are not.

How often can I take out a payday loan?
There is no definitive answer to this question. Payday loans are meant to be used in an emergency so it is never a good idea to use them continually to prop up your everyday living expenses. Each state legislature implements its own regulations for payday loans and in some regions you can have more than one payday loan at a time whilst in others this is prohibited.

In some states there is a limit to the number of loans you can take out in a year whilst in others you can have one every month as long as you repay the loans in full and on time. The important point to take from this advice is that a payday loan should not be the first choice as a means of coping with everyday bills.

In certain circumstances, such as times when an unexpected emergency lands you with a bill that you have not budgeted for, a payday loan can be useful. But, they should not be used to top up your regular income.

Do I need to be a homeowner to get a payday loan?
Both homeowners and renters can apply for a payday loan. The eligibility criteria state that you only need to produce proof of who you are, where you live, your checking account and your regular income. So, renters are as welcome as homeowners to apply for a loan.

Lenders hold all personal information collected from applicants in strict confidence so you can be certain that your details will not be shared with other companies. However, some brokers do pass round the details of applicants so be sure to apply only to a direct payday lender.

Will I be subject to a credit check?
Most lenders do not carry out a credit check on people who apply for a payday loan. If a lender does choose to carry out a check, the process may or may not have an impact on your credit record. Any impact will entirely depend upon your current credit history.

It is also worth bearing in mind that a no credit check lender might offer payday loans at a higher rate of interest than a lender that does ask for the check. The bottom line is that a poor credit rating makes the risk of default higher so the lender will charge more to offset that risk.

Do I need a bank account in order to get a loan?
The simple answer is Yes. Payday lenders will take a post dated check which they will present at your bank when the repayment becomes due. Or, a lender will deposit the loan funds directly into your account and withdraw the repayment amount when the due date arrives. Either way, in order to be eligible for a payday loan you will need a current and functioning checking account.
Do I need to give reason for the loan?
No, a payday lender is not interested in why you need to borrow. As long as you pass the eligibility criteria and can prove that you will be able to make the repayment on time, the lender will not ask for a reason behind the need for a loan.

If your application is rejected it may be because you do not have the necessary documentation or it may be that the lender is acting responsibly and does not feel that a short term high interest loan will actually help your financial situation. If you are already in debt and the lender thinks that another loan will only add to your problems they may refuse the application.

Payday loans are banned in my state, can I still apply for a loan?
In short, the answer is No. However, if you are temporarily housed in a state that prohibits loans but normally live in a state where they are legal, it might be possible. A lender might allow a payday loan if you can prove that your permanent residence is in a state where loans are allowed. But, there is no guarantee that the loan will be approved.

Any lender which advertises loans in a state where they are prohibited should be avoided. Some are scam artists and some are lenders who are using a loophole to get around state legislation. Using illegal loans can result in serious debt.

What is the CFSA?
The Community Financial Services Association Of America is the organization that promotes responsible lending and borrowing practices. This is a body that works with lenders and policymakers to ensure that consumers have protection from predatory illegal lenders.

Along with the Center For Responsible Lending, the CFSA has been instrumental in helping to highlight bad lending practices and worked with state legislators to promote the capping of interest rates and fees for payday loans.

Questions About Applying For A Payday Loan

How do I apply for a payday loan?
Applying for a payday loan is a simple process. If you go to a store you will be asked to complete an application form, provide the necessary documentation and if all goes well, the cash will be paid out straight away. Applying to a local store may be more convenient than traveling further afield but you may not always get the best deal on rates and fees.

Making an application online is also simple and you can do this from your home. But, you should be aware that using a financial loan website carries a slightly higher risk than using a store unless you can be certain that the lender is licensed. Some states do not allow online payday lenders so it may be a matter of what kind of business is available in your home state.

How much can I borrow?
The amount you can borrow on a payday loan varies depending on where you live. In some states, loans are limited to a percentage of your monthly income and in others there is a maximum sum regardless of what you earn. Look at the payday regulations for your home state by clicking on the appropriate article on the website.
How much will a loan cost?
The fees and interest rates for a payday loan are specific to each state. In some states the interest rate and fees are capped and in others there is no cap but the regulations limit the amount borrowed. Most state rules limit the amount that can be charged for non payment and as the time limit for loans is very small, the total costs may prove to be better than using an overdraft. Lenders must adhere to fee limits within the state regulations so it is best to contact the lender concerned and find out the total cost of borrowing before going ahead with a loan.
Are there any hidden costs for payday loans?
The regulations relating to payday loans are in place to ensure that you are fully aware of the costs of using short term borrowing. However, as well as the interest charges and fees charged, there are some potential hidden costs that could apply. If you fail to make the repayment for your loan you could receive an agreed charge from the lender but you might also get charged by your bank for a bounced check and there are also overdraft charges to be considered.

Lenders may be restricted to charging a one off fee for a bounced payment but in some cases there are no limits. Each time the lender attempts to withdraw the funds, the costs from the lender and the bank can soon reach high amounts. If you are taking out a payday loan it is most important to make sure that when the due date arrives, there are sufficient funds in your checking account to make the payment.

How quickly will I receive the money?
Applications for payday loans are usually very quick to be approved. Storefront lenders will process the application while you wait. You will sign a contract stating that you understand the terms and conditions of the loan and the cash will be give to you immediately.

Online lenders will review the application and as soon as it is approved the funds will be sent to your checking account. This will usually take a couple of hours. Or, if the application is made after banking hours you will get the funds the next day.

Can I change my mind?
In some states there is a mandatory cooling off period between applying for a loan and receiving the funds. However, in most cases this is only one day. In many states there is no cooling off period in place. If you do change your mind and have received the money you can ask to repay the loan early. Once again different regulations apply to each state so you might be asked for some interest or even all of the interest agreed if you repay early. It is important to check all the terms and conditions of the loan before signing the contract and receiving the funds.

Questions About Repaying The Loan

How do I make the repayment?
When you take out a payday loan through a store, you will go to the store on the due date to make the repayment. Alternatively, the store will use the post dated check that you provided when you took out the loan. The lender will present this to your bank on the date that your wages are paid in.

To make repayment to an online lender you will be asked to sign an authorization form when you take out the loan. This allows the lender to withdraw the loan amount plus interest when it becomes due.

When will I have to repay a payday loan?
Just as the name suggests, a loan of this kind is due for repayment on your next payday. In most states, loans run for no longer than 31 days although a few states allow payday loans to run for up to 60 days. Check with the lender and the rules for your home state to find out exactly when the loan is due.
How soon can I get another loan?
The amount of payday loans that is allowed will depend on both the state regulations and lending policy of the finance company. Some lenders will allow another loan as soon as you have paid off the first one. But, in some states you may be limited to a number of loans each year so a new loan may be prohibited. State regulations may also apply more stringent criteria to an immediate second loan as the risk is higher and taking out continuous payday loans can cause a greater financial burden.
Can I get a renewal loan?
The state regulations relating to payday loans mean that in some places you can take out another loan to repay the original but in other states this is not allowed. Payday lenders are prohibited from issuing constant payday loans as this can only lead to long term debt. Check out the information for your home state to see if a renewal or rollover loan is legal.
What happens if I cannot make the repayment?
If there are not enough funds in your account to make the full repayment on time, a lender may charge a one off fee for a bounced payment. The regulations in some states allow lenders to make up to three attempts to get the payment. Ethical and responsible lenders will draw up a repayment plan to allow you to make the payments over a longer period of time. However, each state and each lender will have different rules and regulations. Make sure that you are fully aware of what can happen over a non payment before you take out a payday loan.
Can I pay off the loan early?
Repaying a loan early can save you money in fees and interest charges. If you think that you will be in a position to clear the loan ahead of the scheduled date it is important to make sure that there are no early repayment charges. Some lenders apply penalties for making early repayment but most will allow you to clear the loan without a heavy financial loss. Check the terms and conditions of the agreement when you take out the loan.

Summarizing FAQs

The frequently asked questions listed here cover most of the basic information and queries about payday loans. Some of the questions can only be answered by looking at the regulations for payday loans in your home state and you can find a link to each state on the website. If you want to know more details about any of the topics you can look through the range of in depth articles in this series about US online credit.

About the author

Mark Larsen

Mark Larsen has worked in the finance industry for over 20 years. Over the course of his career, Mark has amassed experience in personal finance and especially short-term lending. He shares his valuable insights on onlinecreditusa.com