Payday loans (also referred to as paycheck advance, cash advances, or instant loans) are small, short-term loans that are intended to cover a borrower’s expenses until his/her next payday.
The loans are based on the lender holding the borrower’s personal check for future deposit or having electronic access to the borrower’s bank account to withdraw payment.
To repay the loan, the borrower can allow the lender to deposit the check into his account, pay by cash or just pay the finance charge to have the loan rolled over to another pay period.
What are the typical payday loan terms?
Payday loans range from $100 to $1,000 depending on your state’s legal limits. The average loan is for about 2 weeks and normally has an annual interest rate (APR) of 400% or more.
Finance charges range from about $15 to $30 per $100 borrowed. Two-week loan finance charges interest rates range from 390 to 780% APR. Keep in mind that the shorter the loan, the higher the APRs.
How does a payday loan compare with other cash loans?
Payday loans are very expensive when compared to other cash loans, such as a cash advance on a credit card. For example, a $300 payday loan will cost $52.50 or $105 if renewed once which equates to a whopping 426% interest. However, a $300 cash advance on a typical credit card repaid in 1 month will cost $13.99 in finance charge which equates to a 57% interest rate.
What is required to get a payday loan?
All you need to get a payday is an open back account in decent standing, a job, being at least 18 years old, a telephone number, and identification. No credit check is completed and borrowers are not questioned to determine if they can repay the loan.
Where can I get a payday loan?
Payday loans are typically available at payday loan stores, pawnshops, check cashers, by telephone, and online.
What are the advantages of payday loans?
Payday loans are easily accessible for emergencies if you have no other options, provided you have a job, you are at least 18 years old, and have a bank account that is in good standing. There is no credit or background check and you can get the money with hours or even minutes.
What are the disadvantages of payday loans?
Payday loans are for individuals who are in a tight financial bind. They normally don’t have access to other cash advance methods such as using a credit card.
As a result, payday loans can easily trap borrowers into repeat borrowing because they can’t pay off the initial loan due to the extremely high cost and the short repayment term. Borrowers on average have 8 to 13 loans per year at a single lender.
Additionally, unpaid loans that involve a check that is not covered by funds in the borrower’s account will cause bounced check fees from the lender and the borrower’s bank.
This can add up and will negatively impact the borrower’s credit rating. Researchers have found that payday loan users are almost twice as likely to file for bankruptcy as borrowers who are turned down for a payday loan.
In some states, lenders have sued borrowers who didn’t repay for multiple damages under civil bad check laws.
How does Internet payday lending work?
Internet payday lending adds convenience and security/fraud reduction for the borrower and lender. Borrowers apply online or via faxed application forms. Approved loans are direct deposited into the borrower’s bank account and the loans are repaid by being electronically withdrawn on the next payday. Loans can be automatically renewed every payday by just paying the finance charge.
Military Loans
How do I apply for a military loan?
You will need your military credentials in addition to other personal information to apply for a military loan.
What are the advantages of a military loan?
To get a military loan, you will not have to use any of your assets as collateral. Military loans are unsecured loans. You can also repay these loans early without any interest, fees, or penalties. However, credit history plays a role with some lenders. The better your credit, the better your interest rate will be.
What if I’m stationed overseas?
Military loans are available to active-duty personnel overseas. The loan can be directly deposited into any stateside bank and United States banking institutions overseas or can be mailed to you overseas.
As with any other personal loan it is best to shop around. There are some unscrupulous lenders who will act as if they offer servicemen great deals, but charge higher interest rates and fees than other lenders.
Whatever you decide to use the money for, keep in mind that this is a loan that must be paid back via the terms of the agreement. If you don’t pay it back, it will affect your credit rating. Also, the lower your credit rating the higher the interest you will pay for any future loans.
Bad Credit Loans
Let’s face it, from time-to-time everyone needs a loan, even if you have bad credit or recently filed bankruptcy. Fortunately today many lenders are making it easier for people with bad credit to get loans.
There are a few things you need to be aware of about bad credit loans to be able to get the money you need.
As stated, you can get a personal loan for just about anything, even if you have bad credit.
However, there are things lenders want to see before they issue a loan to you which include:
- Lenders will want to see that you have a decent job and have worked at the job for a while. This shows stability.
- Lenders will want to determine if you can afford to repay the loan payments by looking at your budget.
- Lenders will charge you an interest rate (sometimes much higher) than someone with good credit.
- The amount you can borrow will be lower than someone with good credit.
- The amount of time to repay the loan will be shorter than someone with good credit.
If you are not happy with the items listed above, you have several options:
- Wait for negative items to fall off your credit report.
- Save money instead of taking out a loan
- If you own a home, take out a line of credit (HELOC)
- Work on repairing your credit:
- Remove wrong information from your credit history
- Payoff outstanding debt
- Start paying all your debt on time
Be aware that there are many fraudulent companies that prey on people with bad credit. If they offer a deal that sounds too good to be true, then it probably is. Be sure to shop around before applying for a loan.
Ask around for recommendations and check reputable websites for recommendations and ratings of different lenders. Search the Better Business Bureau (BBB) and Internet for any complaints.
Debt Consolidation Loans
When you owe too much to your creditors, getting a debt consolidation loan is an option for managing your debts. You can use the debt consolidation loan to pay off old/existing debt. If done correctly, debt consolidation can help you save money by paying less interest and getting you out of debt faster.
Debt consolidation is not the sole answer to your debt problems and must be used with other debt management strategies discussed on this website.
When is Debt Consolidation a Good Idea?
Debt consolidation is using your credit to pay off multiple debts by transferring multiple monthly payments into a single payment. The goal with debt consolidation is to accelerate paying off your debt with a lower interest rate, thus saving you money and improving your credit rating.
For debt consolidation to work:
- The interest rate on your new debt must be lower than the debt you are consolidating.
- A lower interest rate will lower the amount of money you have to pay each month.
- Pay off the new debt as fast as possible.
- You do not take on additional debt until you pay off the new debt.
Consolidating your debts into a single payment also is more convenient. No longer do you have to write 5 different checks with 5 different due dates. Now you make a single payment when it’s due. This also limits the chances of late fees and less damage to your credit report.
Keep in mind if you consolidate your debt, you may end up falling behind if you stick to your old habits. Many people will continue to spend or feel they have money to spend because they feel they have things under control with a lower payment. Debt consolidation makes no sense if you do not change your spending habits.
There are several options to consolidate your debts. They include:
- Getting a loan from the bank.
- Transferring the balance from a high-interest credit card to a lower interest credit card.
- Borrow money from your whole life insurance policy.
- Borrow money against your home equity
- Borrow money from your retirement account
- Borrow money from friends/family
You may have to talk to a CPA, financial advisor, or a reputable nonprofit credit counseling agency to determine what the best option for you is.
Promissory Loans
Promissory loans are usually made to family and friends. If you decide to borrow money from family or friends you may feel that your word or handshake is good enough. However, the person lending the money should require that you sign a promissory note to ensure the money is paid back should problems arise.
On the flip side, if you want to borrow money from family or friends, it’s a good idea to offer to sign a promissory note which gives a good indication that you are serious about paying back the loan.
A promissory note is a document that will serve as evidence should disagreements arise or memories fade about the debt, interest rate (if any), and terms of the loan to be repaid.
Advantages and Disadvantages
The advantages of borrowing money from family or friends may include:
- You can get the money quickly. There is no application to complete or credit check required.
- The loan terms are maybe lenient. You may not have to pay it back in a specific time frame.
- The loans most likely will have very low to no interest rates.
However, there are several disadvantages with promissory loans which include:
- May ruin relationship with the person if the loan isn’t paid back as agreed upon.
- If you don’t pay back the loan, the person may sue you.
- You may be embarrassed to tell the person about your financial problem.
- The person may share your problems with other family or friends who you don’t want to know.
Avoiding Problems
If you decide to seek a promissory loan from a family or friend be open to the risk involved with you getting the loan. Be sure to communicate the worst-case scenario which may cause you to not pay back the loan or be late in paying back the loan.
Also, be prepared to explain why you can’t get a loan using other sources. If you were turned down by other sources be open and tell them. Also, emphasize to the family or friend you a requesting the loan from to not lend you money then cannot afford to lose.
Relationships are at stake if problems arise so be very careful. A small loan may not be worth ruining your relationship. Be sure that you can meet the terms of the promissory note.
If your family or friend request you pay the loan back in 3 months and you know it’s impossible for you to do so, do not agree with those terms. Be honest and tell them the true terms you can meet.
If you get the loan and realize there will be problems repaying the loan, notify the family or friend immediately to explain the problem. Do not wait until you are late paying the note to notify them. Don’t wait for them to call you. Be proactive and call them first. This will help with reassuring them that you still intend on paying back the loan.
Promissory Note (Loan Agreement) Example
Below is an example of a loan agreement:
This loan agreement (this “Agreement”) dated this 10th day of January, 20XX between:
John Doe of 999 Loan Street, Englewood, NJ, 07631 (the “Lender)
And
Mary Jane of 2122 Borrower Street, Englewood, NJ, 07631 (the “Borrower”)
In consideration of the lender loaning certain monies (the “Loan”) to the borrower, and the Borrowing repaying the Loan to the Lender, both parties agree to keep, perform and fulfill the promises and conditions set out in this Agreement.
The Lender promises to loan one thousand ($1,000 USD), to the borrower and the Borrower promises to repay the principle amount to the Lender on March 1, 20XX, without interest.
Both parties will then sign the document. It is also a good idea to have a 3rd party sign the document as a witness.