In the United States, 27 states have made payday loan providers a legal service. Nine other states allow a similar practice but with considerable restrictions. The payday loan business is illegal in 14 states and the District of Columbia.
A payday loan is a short-term loan that is almost always secured against a person’s next paycheck. The amount is usually small. From $200 to $400 is average. But such loans can be from $100 to $1,500. The guaranteed payday loans is generally repaid in less than two weeks, the only requirement to get a payday loan is for a person to have a job and proof of the amount of their regular paycheck. No credit check is required.
Payday lending is designed for emergency situations. That may be when a person has a bill that must be paid before their next paycheck can cover that expenditure. A payday loan essentially is created by a portion of a person’s pay before they get it.
The common criticism – and why they are illegal in 14 states – is that payday loans charge extremely high-interest rates. The average interest rate for a payday loan in America is 400% APR. Compare that to the average interest rate on a credit card which is just over 21%. On the other hand, since payday loans are paid off in just a few days, the large interest rate is limited by time.
If interest rates are so high, why is payday lending a popular and thriving business? The answer is that they provide several advantages. First, it’s a fast way to get money into your account when you desperately need it. Not getting that money may end up costing you more for things like late-payment fees, penalties and other charges.
Another advantage is that no credit check is needed. People with bad credit can’t borrow money from any legal lender. No credit cards or bank will touch them. A payday lender only requires that you have a job and a reliable paycheck. (Note: You must also be 18 and have a valid ID, such as driver’s license, passport or Social Security number). Payday loans are also private and discreet. Many payday loan providers now offer online services. That means you can get the money you need zapped into your account electronically, usually in less than 24 hours.
Keep in mind that a payday loan is an unsecured loan. A secured loan usually means using a car, home, mortgage or something else against which you borrow. If you default on a payday loan, the lender cannot seize anything you own. On the other hand, a payday lender will have access to your bank account – and having a bank account is usually a requirement. They might also give your case over to a debt collector or even sue you in court for what you owe.
Advocates of payday loan providers say they are a much-needed service for millions of Americans living paycheck to paycheck. They only become burdensome if used too often. However, a payday lender will lend you money when no one else will and when you need it the most.