Payday loans are often referred to as cash advances or deferred deposit loans. This short-term borrowing method provides you with immediate access to the cash you need to get by until your next payday.
With a payday loan, you write a check in the amount you wish to borrow from the lender plus the lender’s borrowing fee. After the lender gives you the money you need, the creditor will hold your check until you are able to repay the full amount of the loan in cash. Typically, you have two weeks to repay the lender or you will need to pay a rollover or penalty fee, depending on the situation. After you repay the full amount of the loan, the lender will return the check to you without cashing it.
While a short-term payday loan may seem like a practical solution when you need extra cash as quickly as possible, these types of loans can be costly, especially if you cannot repay the lender on the date you agreed upon. Before getting a payday loan, it is typically a good idea to consider other borrowing options that may be available to you.
Refer to the sections below to learn more about the pros and cons of borrowing money with this type of loan, as well as the different actions you can take to use cash advance loans as wisely as possible.
What is a payday loan?
If you need a short term loan for bad credit, a cash advance loan can provide you with the money you need to get by until the next time you get paid. With this type of loan, you can use the money you borrow to pay for anything you wish, including bills or other expenses. However, depending on your situation, it might be a good idea to try certain options before committing to a payday loan. These include borrowing money from a friend or family member, applying for another type of loan or using a credit card with a high limit.
With a short-term payday loan, you can usually borrow as much as $500. However, some states may set higher or lower loan limits. In addition to repaying the full amount of your loan, you will need to pay a borrowing fee that ranges from $10 to $30 per $100 borrowed. Some states set a maximum amount for these borrowing fees, but not all do.
The high rates for a payday loan may outweigh its benefits, depending on your circumstances. However, this can be a useful option if you have an immediate need for cash. In most cases, you can use this short-term loan to borrow money for a two-week period or until your next payday. If you need to borrow money for longer than two weeks, your borrowing fee will likely increase.
Advantages of Payday Loans
If you are managing debt and working to rebuild your credit, a payday loan may be a good option, since even those with low credit can qualify. Other notable benefits of cash advance loans are as follows:
- Depending on where you live, you can get an online payday loan, or you may visit a storefront lender to complete the transaction in person.
- You can use this type of loan to borrow money even if you have bad credit.
- You can use your borrowed money in a financial emergency, like paying a bill to avoid an expensive late fee.
- Depending on the state where you live, repayment plans may be available.
While a cash advance loan can help you in a financial emergency, several other alternatives are also available. For example, depending on your situation and household income, you may qualify for emergency financial assistance through your state or local government.
Disadvantages of Payday Loans
When you use a payday loan to borrow money from a lender, your interest rate will be much higher than it would be if you relied on credit cards or other types of loans in the short term. According to the Consumer Financial Protection Bureau (CFPB), a typical two-week borrowing fee on a $100 cash advance loan is comparable to an annual percentage rate (APR) of nearly 400 percent.
If you used a cash advance loan to borrow $300 and you agreed to pay it back in two weeks, for instance, you would spend around $345 in total if the amount of your fee was $15 per every $100 borrowed. Therefore, another borrowing option may be a better solution for you, especially if you need to borrow money for more than two weeks.
In addition to high payday loan interest rates, other disadvantages of using these types of loans to borrow money include:
- Rollover fees. If you cannot repay your payday loan by the agreed-upon due date, you may need to pay an additional fee if “rollovers” are allowed in the state where you live. If you originally owed $345, for instance, a rollover fee would result in a new total of $390 if you needed to borrow the money for an additional two weeks.
- Fees for returned checks or late payments. In addition to the high cost of borrowing money with payday loans, you may need to pay an additional fee if your repayment is late or you do not have enough funds in your bank account when the lender attempts to cash the check you provided when you took out the loan.
How to Use Payday Loans Wisely
If you feel that a short-term loan for bad credit is the best solution for you in the event of a financial emergency, there are several steps you can take to protect yourself from any potential issues that may arise. These include:
- Shopping for loans with the best interest rates and borrowing fees.
- Borrowing only what you need and can afford to repay.
- Reading any disclosures that your lender gives you.
- Only taking out one cash advance loan at a time.
- Familiarizing yourself with your state’s payday loan laws and regulations.
- Finding out when your repayment is due.
- Asking your lender about the consequences and penalty fees of not repaying your loan on time.
When using this type of loan to borrow money, make sure your lender tells you what your APR will be before you agree to take out the loan. If you are not comfortable with the information the lender gives you, a consumer credit counselor can help you to explore other options that may be available to you.