What’s a Payday Loan? (and 5 Things to Consider Before Getting One)
According to research from CNBC and SurveyMonkey, 65% of Americans live paycheck to paycheck. Inflation, credit card debt and an uncertain job market have all contributed to an increasing number of Americans being unable to build up their savings accounts.
Unfortunately, this can make it challenging to make ends meet — particularly when unexpected expenses such as medical bills arise. When finances are tight, many look to solutions like payday loans to get needed funds. But before you seek this option, it’s important to understand whether it is right for your situation.
I recently had the chance to speak to Tracy Rawle, CEO of Check City, to get a better understanding of what payday loans are and what every individual should consider before they apply for one.
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What are Payday Loans?
What is a payday loan? As Rawle explains, a payday loan is “A small unsecured short-term loan that is used to help take care of short-term financial needs you have. In a nutshell, that’s really what it is. It’s typically a small loan, short term because the borrower typically has some type of a short-term need that they need to take care of.”
While many people take out a payday loan for unexpected expenses like a medical bill or car repair, these are far from the only circumstances when a payday loan might be needed.
For those living paycheck to paycheck, a loan may sometimes be necessary to help with regular expenses. It may also help to avoid late fees, such as late credit card payment fees or bank overdraft fees. A payday loan may also help to avoid utility disconnections linked with late payments.
With that in mind, Rawle advises that potential borrowers consider a few key factors:
1. Earnings, Rather Than Credit for Approval
Rather than looking at an applicant’s traditional credit score, many payday loan lenders primarily focus on an applicant’s earnings, employment and other factors. As Rawle says, payday lenders generally consider the “applicant’s employment, salary and other pertinent information that would help them determine the borrower’s ability to repay that loan.”
As such, borrowers should have clear expectations for how much they can borrow before they apply for a loan — and whether that amount will cover their needs.
2. Make Sure You Understand Total Borrowing Costs
Between applicable fees and interest rates, there are several factors that can influence the total cost of using payday loans.
As Rawle notes, “A borrower needs to carefully review loan disclosures and really understand the fees and not jump into it without really understanding the terms. Because, again, different lenders charge different fees. They’ve got different borrowing loan terms. So it’s important that they really understand the fees charged and the terms to pay it back, so the borrower can really assess if it’s the right thing for them.”
3. Know Your State Regulations
Another issue potential payday loan borrowers should consider is how state regulations could affect their borrowing options. Most states have regulations setting maximum loan amounts, maximum loan terms and finance charges for payday loans. In some states, these types of loans are prohibited outright.
Checking local regulations can help borrowers determine if payday loans are a realistic option for their situation, or if they will need to seek a different lending solution to obtain necessary funds.
4. Prepare for Repayment
Payday loan repayment is often done through an electronic withdrawal from your bank account or a post-dated check that the applicant provides when they get their loan.
To avoid overdraft charges when a withdrawal attempt is made from their bank account, borrowers should be upfront about when their next paycheck will be deposited into their account and try to build up some level of savings so they can have a “buffer” for the repayment withdrawal.
5. Be Mindful of Other Options
Depending on where you live, a payday loan may not be a viable option. In other circumstances, you may not qualify for as large of a loan as you desire.
It never hurts to look into payday loan alternatives, such as a short-term personal loan, car title loan or other loan options available in your area.
The Right Option for You?
As Rawle’s insights reveal, a payday loan can be a useful option when dealing with an unexpected expense, when you need help with regular expenses or when you’re trying to avoid late fees or utility disconnections. However, the nature of payday loans means they’re not right for every borrower or every situation. By evaluating your specific needs, you can determine if a payday loan is the right option for you.
