How to Get a Payday Loan (if you must)

In the world of personal finance, payday loans have become the symbol of ultimate financial distress. The payday loan industry suffers from a poor reputation rivaled only by the tobacco industry. Lately, I’ve done a fair amount of research on the economics behind short-term cash advances. In the course of that research, I’ve come across some information and resources you should know if you are considering a payday loan. So in this article we will discuss the cost of payday loans, state regulation of the industry, and some general guidelines on how to evaluate lenders.

payday loans

Let’s begin with some information that may surprise you. Who is the “typical” payday loan borrower? Here are the stats:

  • More than 60% of payday loan borrowers are women
  • The average age of a borrower is 25 to 54
  • The average annual income is $25,000 to $75,000
  • Borrowers have checking accounts (typically a requirement for a loan)
  • Borrowers are employed (also a requirement for a loan)

What payday loans cost

Are payday loans expensive? That seems like a silly question, but believe it or not, the answer is hotly debated among professors, advocacy groups, state legislators, and of course the cash advance industry. Here’s what all the fuss is about.

A typical $100 loan held for 7 days will cost $15. It’s important to understand that the actual cost will vary from lender to lender and from state to state. So, is $15 expensive? Advocacy groups say yes, and use the annual percentage rate (APR) of the loan to support their views. A $15 fee on a 7-day $100 loan results in an APR of more than 700%.

Payday loan industry groups counter that using an APR to evaluate a short-term loan is misleading. They also argue that it is expensive to process short-term loans, particularly once you factor in defaults. In the final analysis, we can all probably agree that we’d rather keep the $15 for ourselves, but spending it once on a loan would not break the bank, either. And this brings us to a critical aspect of payday loans.

State regulation of the payday loan industry

States regulate the payday loan industry in a variety of ways. In addition to disclosure requirements, many states cap the interest rate or fees lenders may charge, limit the number of loans a borrower can obtain each year, or both. Ohio, for example, recently capped payday loan fees at 28% APR. The advocacy groups cheered the legislation while cash advance stores left the state. Some applaud this move, others wonder where borrowers will go to get short term loans now.

I generally take the view that the government should not decide what is best for you and me. Of course, the government does that all the time. Regardless, it’s important to know that in some states, payday loans are effectively outlawed.

Chronic payday loan borrowing

The real cost and risk of payday loans comes in the form of chronic borrowing. Study after study shows that the occasional use of short term loans to address a financial emergency can actually minimize financial loss to the borrower (by avoiding more expensive options such as late fees and bounced checks). The problem arises when borrowers repeatedly tap payday loans to finance a lifestyle they can’t afford.

In fact, many borrowers rollover payday loans, incurring additional fees that amount to more than the actual amount borrowed. And there are some in the industry that encourage this practice by only requiring the borrower to pay back the fee at the end of the loan. The result is another payday loan to cover the principal amount with a second fee tacked on to the total balance.

The lesson here is do everything possible to avoid rolling over a cash advance.

How to find the “best” payday loan lenders

If you have decided to get a payday loan, there is one resource you should look to before you do–Community Financial Services Association (CFSA). The CFSA is an association representing the payday loan industry. That is important to understand; the CFSA does not represent consumers. However, it has established industry best practices that its members must comply with. CFSA also maintains a list of payday loan and cash advance companies that adhere to its best practices. For example, FastWire Cash is a payday lender that is a member of the CFSA that represents that it adheres to CFSA’s best practices.

Please don’t consider this an endorsement of the CFSA or any of its members. But if I were ever in a position to obtain a payday loan, this is where I would start.

Alternatives to payday loans

No article on payday loans would be complete without a list of alternatives. So if you are in a difficult financial spot and considering a payday loan, check out these other resources.

Dave Ramsey has helped many people climb out of financial turmoil and offers some really sound money management strategies. The M-Network recently published a series on his program, and here are the links:

If you are looking for borrowing alternatives, you can consider Prosper, a peer-to-peer lending site, or credit cards. Credit cards should not be viewed as a long term solution, but if managed well, can be an inexpensive source of short-term cash.

Published or Updated: February 14, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Patrick says:

    I think this is a good assessment. Payday loans, credit cards, or other loans should never be a long term solution, but can be effective when used as they are intended – as a short term means to get by.

    The most important thing is to change your money habits. As you mentioned, I think Dave Ramsey is a good place to start.

  2. Jimmy says:

    What ever happened to the original poor man’s lender – the pawn shop? Here you have a secured loan. If the item is never redeemed, the person’s creditworthiness is not affected. I used to work in a pawn shop. The typical customer was a regular, usually doing some kind of transaction that would net some money, but needed a stake that he didn’t have.

    Payday lenders are a different breed, as they use debt collection techniques to harangue their borrowers.

    Regardless of how people borrow, the root cause of this mess is relaxed borrowing criteria and people’s wants. I don’t understand how people can afford to pay for their cable/satellite TV costs, and their cellphone costs. The cost for texting is ridiculous, yet somehow parents are springing for it. Of course, I don’t have a teenager anymore.

  3. Applying as well as passing our Payday Loans are usually really simple and easy.
    If you already find the right cash provider that has a favourable deal for you, you can start the application approval process.
    Complete the simple online form for application usually located on their personal
    website. Fill with sufficient information asked from you.
    Such information is your name, address, e-mail, bank account and other details.
    The express application process only takes within short while to complete and you will receive fast answer.

    Once you have been approved, patiently wait for the money in
    your bank account within an hour. Lenders who offer such
    loan our Payday Loans process the money within an hour to send it to your account.
    To report to you if the money has been transferred completely,
    confirmation will be sent to your email. Some loan companies or cash providers have a
    fax less process of payday loan that completely
    do not require faxing of files. Luckily, for those who have a bad
    credit history or poor credit scores, checking credits is not usually a need for your qualification.

    for payday loans – our application process is consistently being reviewed and enhanced to help make it much better and more simple for you to follow and
    use. We are committed to making your every visit to DayPayLoan
    a good one so we have shaped every facet of our webpage and application process interested in your requires, at every point.

    To apply, find our very easy web based application and click submit, you will receive a answer in just minutes with our decision and if your request has succeeded you will have your funds after only one hour.
    Payday loans are preferred for life’s little unexpected problems and if used rationally can be a fast source of instant funds should the need come up.
    With ucwords($k);, you no longer need to make useless calls and faxes. Just complete the online form with your specific requirements (volume of loan required along with the time period) and obtain a loan online. You will get instant approval inside hours and the sum will be credited to your bank-account.
    instantaneously, without the need to facsimile all your documents. These aren’t common
    loans wherever supplying tons of information is vital.
    It’s a remarkable approach to sail by means of tough times which are unseen and also unexpected. Financial crisis are at occasions hard to take care of. However, the no fax payday advances make it easier to suit your needs provided you might be honest using your situation also. Don’t
    wait. Do it!

Speak Your Mind

*