Payday loans are short-term loans that range from 13 days to 120 days. Loans that are longer than 120 days are not payday loans.
The reason they are called payday loans is because the amount of the loan depends on how much the borrower expects to get on their next payday.
Generally, a payday loan cannot be higher than 25% of your gross monthly income, or $1,000, whichever is less. So, if you earn $2,000 per month, the most you could borrow from a payday lender is $500.
Payday loan companies target people who are desperate, especially the working poor and elderly on social security. They look for people who need money so badly that it is hard to say no to unfair loan terms.
You should avoid taking out a payday loan if possible. If you need a loan, try a credit union, or see if a friend or relative can help.
Ways to repay a payday loan
There are 3 things a payday loan company may do to make sure you repay the loan:
- Make you give them a post-dated check on the day the loan is signed
- Ask you to sign an authorization that allows the loan company to take money from your checking account
- Make you sign a wage assignment
Interest and fees
Payday loans have extremely high interest rates, averaging about 300 percent. That's 15 times higher than the interest rates credit card companies charge.
There are only 2 fees the payday loan company may charge you.
- $25 fee if a check or electronic debit does not clear (bad check fee)
- $1 maximum to verify that the payday loan is legal
All payday loans now come with a repayment plan. This allows you to stop the interest from building after 35 days. If you have not paid off a payday loan after 35 days, you can ask the payday lender for a repayment plan.
The repayment plan gives you 55 days to repay the loan in installments with no extra charges. If you and the payday lender agree, the repayment plan can be extended to 90 days.
Canceling a payday loan
You can cancel a payday loan and pay no interest charges if you pay it off in full. This must be done no later than the end of the second business day after the day you signed the loan.
Military members and payday loans
A payday loan company cannot garnish your wages to collect on a loan if you are a member of the military.
Another form of short-term lending is car title lending. The title loan company lends money at extremely high interest rates, and the borrower gives the company title to their car as collateral. This means that if the borrower doesn't pay off the loan, they can take the car (repossess it) as payment.
Most title loan companies use balloon payments. A balloon payment is a very high payment that is due on the last month of the loan.
For example, a $3,000 auto title loan would require you to pay $400 each month for 7 months. Then you would have a $3,000 balloon payment in the eighth month. If you can't pay the last payment (the balloon payment) the title loan company can repossess your car and sell it.
Many title loans end up with the consumer losing their car. You should never agree to borrow money from a title lender unless you have a plan to make all the payments of the loan, including the balloon payment in the last month.