When you’re dealing with a small financial emergency and need fast cash, a payday loan may be a viable option. Your loan application can be approved in minutes and you can receive the cash you need in a jiffy. Keep reading to learn more.
How Online Payday Loans Work
In a nutshell, payday loans (or cash advances) are secured debt products, usually ranging from $300 to $1,000. They are designed to cover small but unexpected expenses and are usually due on your next pay date. More on that shortly.
To protect themselves against the risk of default, the lender will require that provide them with an electronic check for the amount of the loan, plus any applicable interest and fees. And in the event you default on the loan, they will use it as collateral.
Most consumers use payday loans to cover everyday expenses, including:
- Rent or mortgage payments
- Auto loan payments
- Electric, gasoline, or water bills
- Auto repairs
- Cell phone bills
- Car insurance or gas bills
- Overdraft fees already incurred from your financial institution
And the list goes on.
Borrowers also use online payday loans to prevent checks from bouncing that have already been written. Mistakes happen, and sometimes checkbooks are balanced incorrectly or money is accidentally spent that was intended to cover a check.
But with a payday loan, you can deposit the funds to prevent the check from bouncing and save yourself a slew of fees from your bank and the service provider, retailer, or company that received the returned payment.
They’re easy to qualify for and in most instances, all you need is a reliable source of income and active checking account, and you’re good to go. Best of all, you may be able to have the funds in your account the same day or as soon as the next business day.
Benefits of Online Payday Loans
No collateral required
Unlike title loan products that can get you fast cash but only if you offer up collateral, payday lenders don’t require you to bring any of your assets to the table. Instead, you use your proof of income to get approved.
No credit checks
Consumers with less than perfect credit sometimes get very nervous when it’s time to apply for loans, and for a good reason. They worry that they’ll be faced with rejection on every turn. And if a lender does give them a chance, they’ll more than likely assess a steep interest rate to hedge against the risk of loss.
The good news is payday lenders generally don’t check your credit history. Their primary concern is your ability to repay the loan, which is why being able to provide proof of income is so important. This also means your credit score won’t be dinged by a hard inquiry.
Easy application process
Online payday lenders make it easy to put out your financial fire. Not only can you apply from the comforts of your own home, office, or while on the go, but you could have a lending decision in just minutes. And if you’ll be able to upload your personal documents, proof of income, and banking information directly to the lender’s online portal so they can finalize your loan and issue the official stamp of approval.
(Quick note: if the lender has a brick-and-mortar location, you may be asked to come in with your documents to have the loan finalized).
If you visit the online lender’s physical location to sign the loan documents, you could walk out with the loan proceeds in just a few hours. But if you complete the entire process online, you can expect the funds to be disbursed to your account as soon as the next business day.
This is arguably one of the greatest benefits of online payday loans. When you’re days away from eviction or your utilities being disconnected, online payday loans can give you a peace of mind.
And even if it’s something a bit less serious, like a past due car note, having the funds you need to get caught up beats having your car repossessed, doing even more damage to your credit, and having to find a way to get where you need to go until you can afford to pay the funds to get it back.
Refinancing options available
What do you do if you realize you won’t be able to repay the loan when it’s due? In most instances, you’ll be able to reach out to the lender and request an extension. In essence, you’re refinancing the loan and should expect to pay a fee, but it beats a missed loan payment being reported on your credit report.
Peace of mind
While this isn’t a tangible benefit, it helps to know that you can get your finances back on track and avoid those sleepless nights, at least for a few weeks, by taking out an online payday loan.
And because there’s no credit check, you won’t have to spend a moment worrying about the possibility of being denied and feeling ashamed because you’ve had some credit troubles in the past.
As long as you have a steady source of income and a valid bank account, the odds are definitely in your favor when seeking a loan from an online payday lender.
Drawbacks of Online Payday Loans
High interest rates
Credit card APRs are quite high, but the rates you get with a payday loan are even higher. On average, you can expect to pay at least 300 percent in interest (as APR) on the loan proceeds. And this limit can be even higher, depending on your finances and the lender. So, you can’t afford not to pay the loan back in time or the interest could become problematic rather quickly.
Automatic withdrawals for payment
Online payday lenders use the same account that the funds were disbursed in to collect payment. This can be problematic for a few reasons.
For starters, you may not be comfortable with the idea of a lender having direct access to your bank account.
Furthermore, if the funds are unavailable when the transaction is processed to collect payment, you’ll incur fees from both the bank and payday lender.
And if the funds are there but you had already allocated them to something else and forgot to contact the lender for an extension, you’ll be forced to take out another payday loan.
If you collected your funds directly from their physical location, the lender will automatically withdraw payments from the account provided on your loan application.
Borrowers are at risk for getting into even more debt
While the refinancing is somewhat of a perk if you working diligently to get back on track, it could also mean trouble for your finances.
Each time you extend the loan, fees and even more interest is tacked on. And if you continue to perpetuate the cycle without making any payments on the loan, you’ll end up paying thousands of dollars for a loan that should have only cost you a few hundred dollars as the interest charges could end up exceeding the initial loan amount.
How to Qualify for Online Payday Loans
As mentioned earlier, you don’t have to have perfect credit when applying for a payday loan. In fact, lenders won’t even check your credit. Their primary concern is your income, so as long as you can provide proof that you have a steady source rolling in, you should be all set.
This also explains why the interest rates for payday loans are substantially higher than what you’d find with more traditional unsecured loan products..
You’ll need to meet the following criteria to qualify for an online payday loan:
- Be at least 18 years of age or older
- Be willing to provide personal identifying information, including a Social Security number, along with a valid work and home number
- Have a valid checking account with your name on it. (Note: you’ll have to sign a post-dated check authorizing the loan proceeds plus interest and fees be repaid on your next pay date).
- Have a steady source of income (could be from self-employment, government benefits, or alimony)
How to Apply for an Online Payday Loan
Ready to apply for an online payday loan? If you know which lender you’d like to do business with, visit their site, complete, and submit the application. You should have an answer within seconds, and if you decide to move forward, be prepared to upload documentation to their online portal that proves your identity and substantiates the income and bank account data you included in the application.
But if you aren’t quite sure which lender is best, consider using an online loan search and comparison tool to help you find and narrow down your options. Once you’ve found a lender you like, you may be able to apply on the spot. Otherwise, you’ll be directed to that lender’s website to complete the application process from start to finish.
What Happens If You Can’t Afford to Repay the Loan?
Do you recall that electronic check the online payday lender made you put on file when you took out the loan? Well, if the due date rolls around and you go missing without a trace, the lender will simply cash the check. And if the funds aren’t in your bank account, you’ll incur fees from both your financial institution and the lender.
You should also expect the lender to start pestering you with phone calls or even worse, turning it over to a collection agency to turn it up a notch in hopes that they’ll collect what you owe. And if their attempts are unsuccessful, the lender will write off the loan and report it to the credit bureaus as a collection account.
But what if you’ve already rolled the loan over several times and are out of refinancing options with the lender? Unfortunately, if you can’t work out an agreement that works for both parties, the account may be turned over to collections and reported to the credit bureaus. This can have serious implications for your credit rating and make it even harder to qualify for loan products in the future.
What to Do If You’re Rejected for an Online Payday Loan
Denied for an online payday loan? You may be able to find an alternative lender that will approve your application. But in the meantime, you should do your research to determine why your application was rejected. That way, you’ll know what issues need to be rectified.
Some common reasons why online payday loan applications are denied:
- You have a tarnished track record.
- You don’t meet the minimum income criteria or your employment history isn’t substantial.
- Your banking history isn’t long enough.
- Your banking history reflects severe account mismanagement, including repeated overdraft or NSF fees and bounced checks.
- You’ve recently filed or are currently in bankruptcy proceedings.
- You’re an active-duty military member.
Should You Apply for an Online Installment Payday Loan?
Considering an online installment payday loan? It may seem like a feasible idea as you’ll have more time to pay back the lender. However, the interest rates are sky high, particularly if they’re advertised as a no-credit-check product. This means you will pay triple, quadruple, or even more in interest by the time you’ve repaid the loan in full.
Therefore, you should only take out an online installment payday loan if you have the means to make timely payments and possibly eliminate the balance before the loan term ends.
The Bottom Line
While payday loans are often frowned upon because of their high-interest rates, they are an easy way to get over a rough financial until the next direct deposit hits your account. And as long as you manage your finances responsibly and pay back the loan with interest in a timely manner, you can minimize the impact on your wallet.
Most importantly, never sign on the dotted line unless you’ve read and completely understand the fine print