Payday loans: How do they work
However a customer is applying, the decision to approve (or decline) is usually a fast one. Once proof of income and identification have been established, it’s usually just a matter of minutes before the decision comes through.
If approved, the customer will then authorize the lender to withdraw money from their checking account once the loan period is over, or hand them a post-dated signed check. Again, the repayment period is usually either two weeks or one month.
The amount a customer can borrow will be subject to two factors – how much the lender sees fit to lend without incurring a huge amount of risk and the maximum loan limits set by each state. Once the paperwork is in order, the money will be transferred to the customer, typically electronically into their checking account. This can take a matter of hours (it is usually much faster if the payday loan is applied for in person at a physical store) or sometimes up to two business days.
This is by far the most important issue to consider when thinking about taking out a short-term loan. As stated, payday loans are issued more easily than many other types of loan (mortgages, etc), but the stipulation is that the money comes at a much higher price.
It’s very unwise to arrange a payday loan as a first option, and much better to explore all the other ways to raise money before applying for one. Interest rates vary according to personal circumstances and the amount borrowed, but on average, each $100 borrowed from a payday loan company will cost between $15 at the low end and $35 at the higher end (sometimes even much higher than this at less reputable companies).
To break that down, if a customer borrows $100 for two weeks and the charge is $15, that works out at 390% APR. Recent studies put the average cost of borrowing $100 for two weeks at $, which is a very expensive 610% APR.
In an emergency, and if no other possibilities present themselves, this may look like an acceptable price to pay, but customers must be very careful not to trap themselves into a cycle of debt, where they repeatedly borrow more to pay off the fees of a previous loan.
Payday loans and credit ratings
Payday loans are an attractive proposition to people with very bad credit or perhaps no credit rating at all. Most (though not all) payday loan companies do not check the credit history of the customer, so simply applying for or taking out a payday loan will not usually affect an individual’s credit rating.
Some payday loan companies have schemes where if a customer makes on-time payments, they report this to the credit rating companies so customers can slowly build up better credit (again, this is a risky and expensive way installment loans Idaho to do this). The downside of course is that if there are missed payments or a customer defaults on a loan, this information also gets reported.
What happens with non-payments?
If a customer fails to make the repayments that were agreed upon, the company will still try and recoup that cash. They will likely work with the customer at first, breaking down installments into smaller chunks or rolling over the loan, but these practices almost always incur extra fees or administration charges so it’s hard for struggling customers to get back on track.
In extreme cases, payday loan lenders will sell the loan to a collection agency, who may be much less understanding about an individual’s circumstances. Court judgments and the like can follow. In short, if you really do have to take out a payday loan, be very sure that the repayments are within your means in the immediate future, as not paying can again drag a person into a cycle of debt that is very hard to escape.