Payday loans are loans of last resort and should not be used
with any regularity. Their interest rates are exorbitantly high (borderlining
on usury), and once a person begins getting payday loans, it can become almost
addicting. Many people who start out getting payday loans do so with good
intentions, only to end up hopelessly trapped in an endless cycle of
never-ending debt and loan fees.
How It Works:
A payday loan can be taken out online or in person.
In Person:
If a person gets an in-person payday loan, he or she fills
out an application and provides two recent pay stubs. After the loan is
approved, the borrower writes a check for the loan amount, plus a borrowing
fee, to the lender. The lender holds onto the check until the borrowers next
payday and then deposits it.
Sometimes the borrower does not have enough money in the
bank for the check to clear. So he pays the loan fee and extends the loan for
two more weeks. This is how the endless debt cycle begins.
Online:
To get an online payday loan, a borrower doesn't even have
to leave home. He or she fills out the application of a payday loan broker and
returns it. The loan broker reviews the loan application and submits it to the
lender who best fits the borrower's needs. Once the lender approves the
application, the borrower gives the lender the pertinent bank information. The
lender deposits the money electronically into the borrower's checking account.
When the loan becomes due and payable, the lender then
withdraws the loan proceeds, plus the loan fees, from the borrower's account.
If the borrower wishes to extend the loan for another two weeks, he or she
notifies the lender and pays the loan fees only. The loan is then is rolled
over for two more weeks when the loan proceeds, plus new loan fees, will be
automatically withdrawn from the borrower's checking account.
Interest Rates:
Most loan fees on payday loans are between $15 and $20 for
every $100 borrowed. If a borrower's loan fee is $17.50 per $100, the interest
rate (are you sitting down?) on that payday loan would be 456 percent. This is
the main reason that payday loans should be used only in an emergency.
How to Qualify:
Payday loans are easy to qualify for. A potential borrower
must be a U.S. citizen and be over the age of 18. A borrower must make at least
$1,000 gross income monthly and have been on the job for at least six months.
(Some payday lenders will waive the six-month work requirement.) People who are
living on a fixed income such as Social Security Benefits or Workers' Compensation
Temporary Disability Benefits can also get a payday loan as long as they make
at least $800 a month and meet the other payday loan requirements. Last, the
borrower must have an active checking account.
States Vary:
Many states have been cracking down on payday lenders
because of their high interest rates. Below is a state-by-state summary of
payday loan laws, borrowing amounts, fees and finance charges:
Loans of Last Resort:
For people who are going through hard times, like a
foreclosure or a bankruptcy, payday loans are a godsend because no credit check
is ever run. If a person with bad credit needs new brakes or a new hot water
heater, a payday loan can serve a good, one-time function.
