Payday loans, also known as cash advances, are short-term, low-balance, high-interest loans typically at usury rates. They are so named because of a tendency for the funds to be borrowed on a postdated check or account withdrawal authorization effective on the borrower’s upcoming payday.
These loans are designed to be quick and generally easy to qualify for if the applicant has a job, a valid form of identification, a checking account, and is age 18 or older. They are intended to help consumers get some quick cash to hold them over until their next paycheck, hence the name “payday loan.” Payday loans are also called cash advance loans, deferred deposit loans, postdated check loans, or check advance loans.
- The basic requirements for a payday loan are a source of income, a checking account, and valid identification. Borrowers must be at least 18 years old.
- The application for a payday loan can be approved within minutes, but the loans come with extremely high interest rates that catch many people in a spiral of rising debt.
- Recent Consumer Financial Protection Bureau (CFPB) rulemaking removed one key provision of the original 2017 payday lending rule and left in place another.
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Basic Requirements for Payday Loans
According to the U.S. government’s Consumer Financial Protection Bureau (CFPB), to qualify for a loan, most payday lenders only require that borrowers:
- Be at least 18 years old
- Have an active checking account
- Provide some proof of income as well as valid identification
The loan can be approved in as few as 15 minutes. In most circumstances, the borrower writes a check for the loan amount plus a lending fee, and the lender holds onto the check until a predetermined due date.
Most payday loans are extended for just a few weeks. When the loan comes due, the borrower either pays off the loan or allows the lender to cash the postdated check or otherwise make a withdrawal from the borrower’s account.
Recent CFPB Rulemaking
The CFPB issued a final rule on July 7, 2020, that removed a requirement of a 2017 Obama administration rule mandating that payday lenders assess a borrower’s ability to repay a loan and left in place an Obama administration requirement that limits repeated attempts by payday lenders to collect from a borrower’s bank account.
Leading up to that July 7 rule, the then-Trump administration issued proposed rules in February 2019 to revoke the mandatory underwriting provision of the 2017 rule and to delay the Aug. 19, 2019, implementation of that rule, followed by a June 6, 2019, final rule delaying the August 2019 compliance date.
The Risk of Payday Loans
Many borrowers run into financial trouble with these kinds of loans when they can’t pay them off as they first come due. Each time the borrower extends the loan, more fees are tacked on. Payday lenders charge a fee of $10 to $30 for every $100 borrowed, according to the CFPB. A $15 fee works out to about 400% annually.
Payday loans are accessible to consumers with poor credit and usually do not require a credit check. About 12 million Americans use payday loans each year, and most of them do not have access to a credit card or savings account, according to the Pew Charitable Trusts.
Payday loans are risky, often leading the borrower into much worse financial condition down the road. They are banned in many states.
Payday Loan Interest Rates
Loan requirements should not be the only consideration for people thinking about a payday loan. In terms of annual percentage rates, it is not uncommon for payday loans to exceed 500% or even 1,000%. Even though business models and regulations limit the size and duration of payday loans, these types of loans are still an expensive alternative and should be undertaken with care.
Because of the high interest rates, payday loans are the most expensive way to borrow money. Some states have laws regulating how much payday lenders can lend and how much they can charge for loans, while other states, like New York, ban the practice of payday lending altogether. In those states where the practice is banned, lenders often get around the regulations by partnering with banks in other states.
Payday Loan Amounts
Qualifying loan amounts vary depending on the borrower’s income and the payday lender, although most states have laws establishing maximum payday loan amounts. Some states even limit the ability of borrowers to have multiple outstanding payday loans in an attempt to keep consumers from borrowing large amounts at extremely high interest rates. Loan amounts can vary from $50 to $1,000, depending on state law.
Are payday loans illegal?
Payday loans are illegal in 18 states—Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia—and the District of Columbia. Rates are capped in many other states.
Can payday loans affect my credit?
Payday loans are not reported to any of the three major credit bureaus, so they will not lower or raise your credit score directly. However, if you fail to repay your loan, the lender can send your loan to collections. The collections agency may report the debt to the credit agency, which could lower your score.
Is there a cap on how high payday loan interest rates can be?
Some states do limit the amount of interest that payday lenders can charge, but in states without restriction, rates can go as high as 1,000%.
The Bottom Line
Payday loans are available to anyone with a source of income, valid identification, and a checking account. However, these loans can quickly escalate, charging predatory lending rates that sink borrowers deeper in debt. Be wary when considering a payday loan, and make sure that you can repay the loan in a timely manner.