Hidden Fees of Payday Loans

By Courtney Dodson

A payday loan is a type of short-term personal loan that can help cover immediate cash needs, also sometimes called a cash advance. Payday loans are typically based on the borrower’s earnings, so a pay stub and form of identification are usually required at the time of application. Some lenders may also require a hard credit pull to check your credit history and score, but many do not—making it possible for people with poor credit to take out a loan. Most often, payday loans are offered for small dollar amounts with a high interest rate, but regulations vary from state to state. 

Payday loans can be obtained from a payday lender at a physical location or online. The money is usually provided in the form of cash, a check, a prepaid debit card, or a deposit into your bank account. The loan must be repaid by the due date specified in the loan agreement, which is commonly 14 days later or the date of your next paycheck. At the time of the loan agreement, you’ll provide either a post-dated check or access to your checking account to ensure repayment to the lender.

Because of their short terms and low dollar-limits, payday loans are commonly borrowed for unexpected expenses, like medical fees, car repairs, or emergency fixes at home. A quick cash deposit can seem like a simple solution for a broken water heater or new tire without asking friends and family for money.

Payday loan options

The terms “instant loan”, “one-hour loan”, and “24-hour loan” are all used to describe different payday loans, but the concept for each one is similar—you can apply for a loan, get immediate or rapid approval, and receive the money within a short timeframe. Many instant and one-hour payday loan options are offered online and do not require a credit check, but you may end up waiting longer to receive your money if the application is submitted after business hours or additional information is needed. 

Unlike other types of payday loans, a cash advance is typically issued by a credit card company. In this case, the loan is borrowed from a line of credit through your credit card, and the money can be withdrawn from an ATM or from a check that is cashed at a bank. 

Fees associated with payday loans

Payday loans have a poor reputation due to extremely high interest rates and fees. A percentage or dollar amount is usually charged per $100 borrowed, though the exact amount is regulated per state and varies. A fee of $15 per $100 is common, which is equivalent to an annual percentage rate (APR) of nearly 400% for a two-week loan. Based on this rate, if you needed to borrow $500 before your next paycheck, it would cost you $575 to repay the loan. 

Since most payday lenders require a post-dated check or checking account information before issuing the loan, a borrower may have insufficient funds on the scheduled repayment date. If this occurs, the lender may charge a late or returned check fee in addition to the penalty charged by the bank. Some states allow lenders to offer a rollover option, where the borrower is immediately responsible only for the fees while the loan balance is extended to a later date. In theory, this gives the borrower more time to repay the loan, but it can also result in large fees if the cycle continues. 

Other fees to consider include prepaid debit card fees. If your payday loan was loaded onto this type of card, you may have to pay fees for checking your balance, using the card, adding money to the card, and more. ATM fees for cash advances are also commonly overlooked, but can add to the cost of taking out a payday loan. 

Benefits and risks

The benefits of taking out a payday loan are straightforward: It’s a quick way to access cash that doesn’t require good credit. In a true emergency, a payday loan could be beneficial for someone who can afford to repay it (along with its fees) with their next paycheck. 

Unfortunately, payday loans often target people who are struggling with finances already. They run the risk of falling into even greater debt if they are unable to repay the payday loan within its short timeframe. In fact, more than 80% of payday loans are rolled over or reborrowed within 30 days. This cycle of debt accumulation has caused some states to outlaw payday loans altogether, including Arizona, Arkansas, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, New Mexico,  Pennsylvania, Vermont, and West Virginia.

There are pros and cons associated with payday loans, and it’s important to carefully evaluate your options before making a decision.

Read more about personal loans and the definitions you should know.

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