Although there is no exact definition of the term payday loans, it is usually a high-cost, short-term loan and usually for $ 500 or less, which normally expires on your next payday. Depending on your state’s legislation, payday loans may be available through lenders from local establishments or online.
Some common features of a payday loan include
- Loans are for small amounts , and many states set a limit on the amount of the payday loan. The amount of $ 500 is a common loan limit, although some limits go above and below this amount.
- The payday loan is usually paid in a single payment on the debtor’s next payday, or when income is received from another source, such as a pension or Social Security check. The due date is usually two to four weeks from the date of the loan. The specific due date is set in the payday loan agreement.
- To pay off the loan , you usually write a check with a future date for the entire balance, which includes the charges, or you offer the lender an authorization to debit the funds electronically from your bank account, credit union or prepaid card . If you do not pay the loan on or before the due date, the lender can cash the check or withdraw the money electronically from your account.
- The lender who makes the payday loan generally does not take into account your ability to pay the loan while you try to meet your other financial obligations.
- You can provide the loan funds by check or cash, or they are deposited in your account electronically, or charged to a prepaid debit card.
Other features of the loan may vary. For example, payday loans are often structured to be paid in a single payment. Some state laws allow lenders to “refinance” or “renew” a loan when it expires, so that the consumer only pays the loan charges and the lender extends the due date. In some cases, payday loans may be structured to be paid in installments over a longer period of time.
The cost of a payday loan
Many state laws set a maximum amount for payday loan charges, ranging from $ 10 to $ 30 for every $ 100 lent. A typical two-week payday loan with a charge of $ 15 for every $ 100 corresponds to an annual effective rate (APR) of almost 400 percent. In comparison, the APR on credit cards can vary from about 12 percent to about 30 percent. In many of the states that allow payday loans, the cost of the loan, the charges, and the maximum amount of credit have a limit.
Laws in your state may authorize, regulate or prohibit these loans
Some states do not have payday loans because these types of loans are not allowed by state law or because the lenders decided not to do business at the interest rate and the fees allowed in those states. In the states that allow or regulate payday loans, you can find more information from your state regulator or the state attorney general .
Can you arrest me if I can’t pay my payday loans?
No, you cannot be arrested for failing to pay a payday loan. However, if you receive a lawsuit or a court ruling has been issued against you and you ignore a court order to appear, a judge can issue an order for your arrest.
You should never ignore a court order. If you receive a court order to appear in court, you must go to court and provide all the necessary information. If you wish, you can consult with a lawyer to ask for help with your court appearance. If a lender threatens to have you arrested, you should report the lender’s threat to the state attorney general (in English) and your state regulator.
Does taking a payday loan help rebuild my credit or improve my credit score?
Probably not. Generally, payday loans are not communicated to the three main national credit reporting companies, so they are not likely to affect your credit score.
Most local payday lenders do not consider traditional credit reports or credit scores when determining eligibility for a loan. Nor do they usually communicate information about the history of payday loans to national credit reporting companies.
However, if you do not pay your loan and your lender sends or sells your payday debt to a debt collector, the debt collector may report this debt to one of the leading national credit reporting companies. Debts in collection can damage your credit score.
Also, some lenders file lawsuits to collect unpaid payday loans. If you lose a court case related to your payday loan, that information may appear on your credit reports and may lower your credit score.
What should I do if I can’t pay the payday loan?
If you have trouble paying your payday loan, you may ask your lender to extend the repayment plan.
An extended payment plan allows you to pay the loan in smaller installments over a longer period of time. Whether you can get an extended payment plan will depend on your state legislation or the policy of the payday lender. This payment plan can be offered for free or you can carry an additional charge.
If you are still having trouble making payments, or are not offered the option of an extended payment plan, there are other resources that may be helpful. For example, you may want to speak with a credit counselor in your area or contact a legal aid lawyer (in English) to discuss your options. If you are a member of the armed forces , contact the local Office of the Military General Counsel ( JAG ) for more information. You can use the JAG legal aid office locator to seek help. You can also request information at your company’s financial resources office.