A payday loan is a type of unsecured personal loan, also known as a cash advance loan or check advance loan, that is short-term term with a high-interest rate.
While some lenders use a portion of a borrower’s earnings as collateral, it is not always required for this quick credit option. But needing collateral is not outside the realm of possibilities.
This makes payday loans a desirable choice for those with bad credit, high amounts of debt, or those in need of immediate cash.
At the same time, predatory lenders have given payday loans a bad name.
There are pros and cons to this type of loan. It is important to understand the truth about payday loans in order to borrow safely.
Pros & Cons of Payday Loans
Payday loans, while alluring, are not perfect options for those struggling with poor credit. This type of loan has its benefits and drawbacks.
Benefits of Payday Loans
In most states, payday loans are widely accessible and easily distributed.
Individuals looking for a loan can find a variety of options through online lending sites, individual creditors, and credit unions.
There is no credit check during application, making payday loans even more accessible. Most lenders only require a current pay stub to apply. The borrower’s ability to repay is also not usually considered.
Applications and the approval process for payday loans tend to have a quick turnaround time, making it a type of same-day loan.
Borrowing capacity and loan principal for payday loans are based on a portion of the borrower’s next paycheck. The portion varies depending on the lender and the state’s payday-lending laws. Usually, the higher a borrower’s wages, the more they can borrow.
Payday loans do not normally require collateral. Occasionally, lenders may ask for a percentage of the borrower’s wages as collateral, but this is rare.
Cons of Payday Loan
One major drawback of a payday loan is the interest rate.
The interest rates for payday loans are astronomical, even under state-by-state regulations.
The annual percentage rate (APR) for an average, two-week payday loan with a $15 per $100 fee can run as high as 400%, according to the Consumer Financial Protection Bureau (CFPB).
Comparatively, the average APR on a credit card ranges from 12% to 30%.
Payday loan amounts are short-term and normally quite small. They can range from $100 to $1,000, but the average borrowing amount is about $500 or less.
Oftentimes, hidden additional fees are attached. Combined with high interest rates, this can make payday loans cost more than what they’re actually worth.
The History of Payday Loans
Starting in the 1990s, when payday-lending in the United States became mainstream, usurers took advantage of then-unregulated payday loans to discretely charge extra fees and increase interest rates, trapping borrowers in debt.
After the 2008 financial crisis, however, federal financial agencies such as the CFPB designed stricter laws to protect borrowers, making the lending market safer and more transparent.
Laws and restrictions pertaining to payday lenders and payday loans depend on the state. For instance, in New York and New Jersey, payday loan annual interest rates are capped at 25% to 30%.
While federal and state management help to prevent criminal usury, payday loans are still risky as some lenders will find various loopholes to bypass interest rate caps and other regulations.
Those considering applying for a payday loan must carefully examine the loan’s borrowing terms, namely the interest rate and associated fees to ensure they do not get caught in a debt trap.
Each state has its own bank regulator designated to assist in managing in-state financial business. State bank regulators can help verify if a lender is licensed to extend payday loans within your state.
Payday loans in New York are regulated by the New York State Banking Department.
There are also other ways to confirm the integrity of a loan agreement.
A financial consultant can help analyze the details of a payday loan agreement. Free financial counseling is available for members of HRCCU.
Our team of financial experts work closely with borrowers to understand their current financial situation, discuss options, and determine the best path to achieve financial goals.
Alternative Personal Loan Options with HRCCU
Borrowers should prioritize low interest rates and fees when shopping for personal loans. Considering the riskiness of payday loans, it is important consumers look at other same-day loan alternatives.
There are a number of options for consumers from credible financial institutions.
A great, quick installment loan for those with bad credit is a personal loan. Personal loans are immediate, include reasonable APRs, and collateral is not mandated.
HRCCU offers low-interest, unsecured (loans that do not require collateral) and secured (loans that do) personal loan options. Currently, there is a special 90-day grace period on HRCCU personal loans.
Borrowers who receive an unsecured loan from HRCCU can receive a maximum term length of 60 months.
HRCCU secured personal loans offer borrowing terms for 12 to 144 months. These secured loans are backed up by a shared savings account, where deposits serve as collateral during the loan term.
With HRCCU, loan application and approval is quick, straightforward, and easy. Our financial team strives to give borrowers peace of mind while securing their loan.
To learn more information about the loan options available, and to ensure you are receiving the best loan option to suit your needs, contact us today.
