Is Getting A Payday Loan A Good Idea?

Short term loans are designed to be paid off in a short period of time, typically less than a year. Long term loans are designed to be paid off over the period of many years. One type of short term loan that is often misunderstood is the payday loan. A payday loan is a microloan, or a small loan amount, that is paid off in a short amount of time. Read on to learn more about payday loans and whether they are a good fit for your needs.

What is a Payday Loan Exactly?

The payday loan concept is simple. The lender and the borrower agree to a lending contract. This contract specifies an exact amount of money to be borrowed, and the amount that is expected to be paid back on a specific date.

The difference between this type of loan and all other loan types is the time-scale. A payday loan is usually paid out to the borrower on the same day, often within a few hours. The borrower is expected to pay the entire loan off in full on the exact date specified, typically on the next pay period or within thirty days.

What Happens During the Payday Loan Process?

The process of acquiring a payday loan is fairly uniform across the board. Typically, you will need identification, proof of income, and proof of residency. The last part may not be as necessary for online loan lending. Payday loan lenders rarely perform credit checks due to the small amounts of money lent and the short repayment terms.

When you begin the payday loan process you will apply for the loan. This requires filling out paperwork or an online form that requires the aforementioned information. If you apply for a payday loan online, you will usually need to have a bank account available that can accept electronic funds transfers for both automatic withdrawals and deposits from the account. If you apply for a loan at an offline location the loan lender may require either the bank account access mentioned or a post-dated check that will be viable on the specified repayment date.

It should be noted that there are different laws regarding payday loan lending in different states. North Carolina, for instance, does not allow legal payday loan lending at all. Alabama, however, allows payday loans with the following provisions:

  1. A payday loan cannot exceed $500
  2. The minimum repayment date has to be at least ten days after the initial borrowing date.
  3. The maximum repayment date has to be no more than 31 days from the initial borrowing date.
  4. The maximum fee amount that can be charged is 17.5% of the amount lent.

Payday loan lending should be seen as an emergency monetary lending practice due to the short-term nature of the loan and the often high fees involved. For instance, if a loan is taken out in Alabama for the amount of $100 and it is meant to be repaid in two weeks it can cost up to $117.50 due to interest rate limits.

However, if the amount is not paid in full that initial $17.50 fee can roll over to the next pay period one time. Alabama law would not allow the debt to grow much, if at all, beyond that point.

In some other states there are no rollover limitations. The rollover effect is the reason for many of the horror stories that are told about payday loans. In the instance specified, had the loan rolled over six times the total fee would have been higher than the original loan!

The truth is, however, that payday loans are meant to be repaid completely on the specified pay period. If they are paid in full, a payday loan can be a great boon in an emergency. If the loan is allowed to roll-over repeatedly the amount that will need to be repaid is much higher.

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