Payday lending often gets a bad rap for taking advantage of people with bad credit by providing short-term, high-interest loans. But for many people, taking out a payday loan seems like the only option when they are cash-strapped and don’t have other credit available to help out. And with lenders available both in stores and now online, getting a payday loan is easier than ever.

Payday Loans

Before you take out that loan, however, it’s important to understand exactly what a payday loan is and how it really affects your wallet. Make sure you have all the information before making any financial decisions, especially when it comes to payday lending.

What are payday loans?

A payday loan is a small loan amount borrowed for a short period of time, usually until your next paycheck. Most people use payday loans to help tide them over when their income falls short of their monthly bills or they can’t cover an emergency like a car repair or medical bill.

The most common loan period is just two weeks and the loan limit is generally $500 or less, although some places may allow loans up to $1,000. What attracts most people to payday loans is that you don’t need good credit to qualify. But they’re not a long-term solution to financial troubles. If you are unable to repay the loan, you’re charged a high refinancing fee that grows each time you renew any portion of the loan amount.

So how does a payday loan work? Even though you don’t need good credit for a payday loan, you do have to go through an application process either online or in person. Once you’re approved, one option you have is to give the lender a check for the amount you owe, pre-dated for the loan’s due date (usually your next payday).

Alternatively, you can provide access to your bank account and authorize the lender to withdraw the loan amount on the due date. If you can’t pay the owed amount in full, you have the ability to rollover the loan into a new one. You usually have to pay the original fee, and you’ll also be charged a new fee for the rollover loan. It’s important to communicate any changes to the original loan terms with your lender as soon as possible so they don’t withdraw cash from your account that either isn’t there or is needed for something else.

Who is eligible for a payday loan?

Your credit score isn’t an issue when applying for a payday loan, whether you have bad credit or simply no credit at all. There are, however, several other qualifications you must meet in order to be approved for the loan. First of all, you need to live in a state where payday loans are available.

Some states ban them altogether, while others implement certain restrictions on them. Established lenders will provide you with this information, but it’s always smart to do your own research to make sure you’re not being scammed. Start by checking with your state banking agency, which regulates payday lenders.

Once you know payday loans are legal and available where you live, you’ll need to prove that you have a steady flow of income. The money doesn’t have to come from a job, but can also come from government benefits, alimony, or other regular income sources. Be prepared to submit copies of pay stubs, bank statements, or a benefits rewards letter from the government to meet this requirement.

You’ll also need to provide your lender with your social security number and your bank account information. Because of the payday loan process, you generally can’t get a loan unless you meet these basic standards. Other minor requirements vary lender by lender, but you can also expect to supply a valid phone number. You must be at least 18 years old, although some states carry a minimum age of 21.

What are the pros and cons of payday loans?

The most obvious benefit with a payday loan is easy access to fast cash. If you live in an area with brick and mortar payday loan stores, you can usually get money the same day you go in and apply. You can also save yourself a trip and apply online. You can sometimes get same day cash this way if you apply by a certain time, but you may have to pay an additional fee.

Otherwise, it takes a couple of business days, depending on the individual lender. Another benefit is that lenders don’t check your credit report during the application process. You don’t have to worry about your poor credit holding you back, or deal with an extra inquiry staying on your credit report for the next two years.

Despite the relatively easy approval process, there are several downsides to getting a payday loan. Most notably is the expensive interest rate attached to them. For every $100 borrowed, you’ll be charged between $15 and $30. That might not seem like a lot when you think of it as a one-time fee, but it’s actually extraordinarily high when viewed as an interest rate. Plus, many borrowers end up rolling over their loans and quickly owe more in fees than their original loan amount.

In a nutshell, it’s easy to get trapped in a vicious debt cycle. Even if you do repay your payday loans on time, those payments aren’t reported to the credit bureaus. So your positive financial behavior goes unrewarded. However, if your loans become delinquent, they can still go to collections and usually do show up on your credit report. In other words, you aren’t rewarded for good behavior but you are punished for bad behavior.

What are usury laws?

All states have different types of usury laws that regulate what type of loan terms lenders can offer. Some states have extremely strict usury laws that completely outlaw payday lending. These include Arizona, Arkansas, the District of Columbia, Georgia, and North Carolina. Others provide varying restrictions on how much interest may be charged, how much may be borrowed, and how long the repayment period can last.

The following states don’t technically outlaw payday loans but hold all personal lenders to the same standards: Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Vermont, and West Virginia. All other states are more relaxed with their payday lending laws.

Some have a maximum loan term, while others allow open-ended terms. Others regulate the maximum loan amount on these high-interest loans, ranging between $300 and $1,000. Oregon is the outlier with a whopping $50,000 cap on payday loans, although the interest rate limit is 30%. Check out the restrictions in your individual state so you know what to expect when applying for a payday loan.

How can you avoid taking out a payday loan?

Taking out a payday loan comes with a large degree of risk, particularly if you’re unsure about whether or not you’ll be able to repay the loan when it comes due. The best way to avoid taking out a payday loan is to increase your credit score and qualify for better loans.

Paying your bills on time and paying down debt are the most reliable ways to raise your score. If your report has several negative items, consider fixing your credit by disputing any of those items that may be inaccurate.

While improving your credit score is the best long-term solution, there are other options to explore when you need money fast but don’t want a payday loan. You can take advantage of your bank account’s overdraft protection; even though there is a fee involved, it’s usually less than those associated with a payday loan.

You can also try lowering your monthly bills by negotiating your interest or repayment period with your current creditors. Another option? Online peer-to-peer funding. Your interest rate will be higher the lower your credit score is, but you might be able to find a deal that is much less expensive than a payday loan. Consider tapping into your savings account or even asking a trusted friend or relative for a short-term loan. We all need help sometimes, and it’s truly best to try and avoid a payday loan as much as possible.

Taking out a payday loan may seem like a quick fix to your financial problems, but be sure to proceed with caution. When you don’t have enough cash to repay the loan after a few short weeks, then you’re likely to be stuck with exorbitant fees that continue to accumulate. And because payday loans are usually only for a few hundred dollars or less, you can easily double or triple your loan amount in just a couple of months.

Fully explore your other short-term solutions before deciding on a payday loan. Once you’ve taken care of your immediate financial needs, evaluate what you can change to avoid future money crunches. Work on improving your credit and re-work your budget to cut costs and save money.