How Do Payday Loans Work?

A payday loan is a common method of obtaining cash at short notice. Payday loans typically do not require credit checks or that the borrower put any money or things down as security. All that is needed is a personal check, like a paycheck, and/or a promise to pay back the loan of the day agreed.

Fees and Interest Rates

The most typical way payday loans are paid for is with an additional fee added onto the loan. These fees are typically charged based on each $100 borrowed. The most common fee is $15 per $100 borrowed. That is, if you pay back the loan as intended, the payday loan company will draw $115 from your account, an interest rate of 15%. While $15 is common, these fees can be as much as $30 per $100 borrowed, or 30% interest.

If a payday lender charges $15 per $100 borrowed for two weeks, this results in an APR of 391%. APR rates for similar situations include, paying a $25 credit card late fee on $100 is 435%.

I Can’t Pay. What’s Going to Happen?

Payday loans typically are very short term, with a typical length of two weeks. As payday loans are typically secured by a personal check, at the end of the term the loan provider will attempt to cash the check. If there is not enough money in the bank account to cover the check, the check will bounce. This may trigger a fee both at the bank and with the loan provider.
Sometimes payday loan providers give options to deal with this situation. Some payday loan providers will allow a borrower to “roll over” the loan. This option gives the borrower additional time to pay while adding on an additional fee. Some payday loan providers will allow a borrower to set up a payment plan in return for an additional fee.

If the borrower fails to pay or make an alternative arrangement with the loan provider by the due date the loan provider will typically add a penalty fee and call the borrower to make arrangements for payment. If these calls are unanswered or an arrangement is not reached within a certain period, the loan will usually be handed over to a collections agency.

Regulations

Each state regulates payday loans in different ways and to different extents. Most states have capped the amount that a payday loan provider may loan to a borrower. Some states will limit the fee that the loan provider can charge.

Collections agencies are becoming more strongly regulated. The federal government has imposed regulations on collections agencies as have individual states.

Where Can You Find the Right Lawyer?

If you feel your payday lender or a collections agency is dealing with you in an illegal way, you should contact a credit lawyer. They will be able to advise you on your options and what to do to protect yourself.