What are payday loans and how do they work?
If you need fast money, you may be tempted by a short-term loan that you can pay soon. However, whether offered by an online payday loan lender or a check-cashing store in your neighborhood, these loans come with high costs from which it can be difficult to recover.
A payday loan is an advance on your salary that you must repay with your next payday. This is an expensive way to borrow money over a short period of time. These loans can have very high-interest rates.
Characteristics of a payday loan
Payday loans usually do not consist of high amounts, but about $ 500. They usually have higher charges and interest rates than other types of loans. For example, a typical two-week payday loan, with a $ 15 fee for $ 100, would have an annual percentage rate (APR) of almost 400%. Borrowers generally promise to pay off the loan with their next salary. In some cases, the loan is structured through payments over a longer period.
You can receive the loan funds in the form of cash or a check, be charged to a prepaid debit card or electronically deposited into your checking account. To pay off the loan, you usually have to give the lender an authorization to access your account or sign a post-dated check.
Summary of Payday Loans
- You can only borrow a total of $ 700 or 30% of your gross monthly income, whichever is less.
- Your information will be recorded in a database throughout the state, ensuring that all payday lenders have their loan information up to date.
- You can only take 8 loans per 12 month period.
- If you cannot pay the loan before your loan is due, you can request a payment plan without additional charges.
- If you currently have a payment plan, you cannot receive another loan.
- Lenders cannot bother or intimidate when collecting a loan. If you are being harassed, contact the DFI and file a complaint.
What documentation do you need to present to the lender to obtain a loan?
In general, a payday lender requires proof of salary (eg, government employment or benefits), bank account and address. The lender may also ask you for a post-dated check for the full amount of the loan (including loan and interest) or a form authorizing you to withdraw the full amount from your bank account by the due date established in the policy.
What should your payday loan contract include?
The loan agreement should include the following conditions:
- The loan amount,
- The number of days of the loan,
- The total cost of borrowing,
- The maximum cost per loan tranche of $ 100,
- The total amount that will have to be repaid,
- The date on which the loan will have to be repaid,
- The name and address of the lender,
- The signature of the borrower.
- Some lenders require that the loan agreement be signed in person and not over the Internet or over the phone.
Know Your Rights
- Any payday loan obtained from a lender without a license with the DFI, and not paid to the lender, cannot be collected by the lender and the lender cannot initiate legal action in the state of Washington to collect the debt. Look RCW 31.45.105.
- You have the right to change your mind about the loan within one day.
- You have the right to know all the costs involved. You also have the right to a payment plan.
- A payday lender cannot threaten criminal prosecution as a method of collecting an overdue loan.
- A payday lender cannot allow a borrower to use a new payday loan to pay off an existing payday loan by the same lender or a subsidiary of the lender.
- Under the Truth in the Loans, the cost of credit must be disclosed. Among other data, you should receive information showing the financial charges and the annual percentage rate (APR). The APR informs you of the cost of your loan. For example, a 14-day loan for $ 500, with the maximum rate allowed by law would have an APR of 391.07%.
Checklist – Before Taking a Payday Loan
Although a payday loan can be a convenient short-term solution, it is not a solution for long-term money needs.
- Verify the Lender’s License
Contact the Washington State Department of Financial Institutions to verify that you are working with a licensed lender.
- Consider Alternative Solutions
Ask about delaying or making payment arrangements on your accounts that do not generate interest, such as telephone and utility bills. Talk to a friend or family member to borrow money. Ask your employer for the prepayment of your paycheck.
- Loan Comparison
Compare interest rates and lower penalties. For example, some credit unions offer payday loans with lower fees.
- Just Ask For What You Can Allow To Pay
Just ask for what you can pay with your next paycheck.
- Avoid Loans From More Than One Lender
Avoid loans from more than one lender at a time.
- Know If Your Payment Is Due
Know what day your payment is and be sure to pay the loan on time and in full.
- Take advantage of the Organizations that are Available to Help You With Your Financial Situation
Local organizations in Washington are available to help you with your financial situation. Many of these organizations offer help with budget, credit repair, debt repayment, and much more. Contact your consumer credit counseling service for more information.
- Establish a Budget
Plan the future by making a budget to avoid the need to borrow money for emergencies and unforeseen expenses.
Your payday loan expires and you are unable to repay it. What are the consequences?
You may have to pay a penalty ranging from $ 15 to $ 40, depending on the province where you made the loan.
The penalty is in addition to the amount you owe the lender and interest accrues until you repay the loan in full.
Personal Money Network provides other useful information and also offers a payday loan with minimum risks!
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