How Payday Loans Work

How Payday Loans WorkIt’s good to learn how payday loans work, and what sort of trouble people get themselves into so that you can avoid the common pitfalls, and know the score of the game you’re getting into. Many people are old hats and have ridden the payday loan merry-go-round for months or years. But if you’re just starting out, you can get a briefing on what it entails, and make the decision whether it’s right for you or not.

In a Nutshell
Basically, you walk into a payday lender’s office or go through their website. You furnish them with the required information and documentation. They make a quick assessment of your ability to repay the loan, and how much you’re eligible for. They will either give you cash money in your hand at their office, or they will immediately send the funds to your account with an EFT transaction.

You will be given a date on which you must repay the loan in full. In most cases this is your next payday, unless that day is too soon, in which case they will bump it to the following payday. Now the clock ticks until payday. At which time you will either have to return to the office in person with cash totaling the principal that was loaned plus the fee.

The transaction is now complete. You can decide from there whether you need to re-loan the principal, or whether you can make it until your next payday.

Payday Lenders: A Necessary Evil?
Payday loan companies try to paint themselves as the savior to the middle class that keeps them from going belly up completely. But are they really angels, or devils in disguise? It’s easy to see by their rates and fees that they aren’t trying to win the Mother Teresa award for compassion. Many people liken them to loan sharks, and consider their practices predatory lending.

It may seem like they are seeking out people that are down on their luck, and they are just trying to squeeze the last few dollars out of them. But would a world without payday lenders have more bankrupt individuals in it, or fewer. The law of supply and demand says that these companies wouldn’t exist, or be able to stay in business if they didn’t have a regular supply of willing customers.

The question remains, and is up for you to decide for yourself, whether or not payday loans help you out of a tight jam, or further wedge you into one.

How Payday Loans Work: What You’ll Need and Why

Payday lenders will need a bit of information from you before they’ll dispense with the cash. By being prepared before you visit the office you’ll avoid any unnecessary hold-ups and insure a smooth transaction. There’s no need to try to circumvent the system, or ask them to make an exception for you, each lender has rules and they will not bend them just because you don’t have what’s needed.

Drivers License
Many brick-and-mortar lenders will want to see your driver’s license and make a copy of it for their records. It may not seem like it, but this is a rather helpful ID for them to have. First, it helps them confirm visually that you are you. It also lets them confirm the address that you give, and if the two don’t match it tells them something about your stability, that you’ve either recently moved, or you haven’t bothered getting the address changed.

Your driver’s license number can also be used to help track you down through the DMV if you fail to make your payment. Don’t think for an instant that these companies will just let you walk away with their cash without trying their best to get it back from you.

Social Security Card
Some lenders like to also verify your Social Security number before going through with the transaction. Sometimes they can do it through your pay stub, but it’s best to bring it along with you in case they ask for it.

Don’t worry about them using your SSN to check your credit report or credit score. They won’t. They know you probably have credit issues or you would be taking out a loan at the bank or other lender at better rates and terms. The target consumer for payday loans has bad credit, even horrible credit. This is just the type of person they’re interested in doing business with, so you don’t have to fret about handing over your Social Security number.

Telephone Number
If you apply in person, they’ll want your current phone number, and many places will attempt to verify the number while you’re there. This means that they won’t accept any phone number that has been disconnected, or where it doesn’t go to voice mail with your name in the greeting. The best way is to give them a cell phone number and have the phone with you so they can see it ring.

Of course they will be giving you a call if you fail to show up on your repayment date. This is their first line of collection and will give them an idea of what they’re up against. If your phone has been disconnected, they might view it as a total financial meltdown on your part. If they manage to get ahold of you, they will be able to assess your intent to pay by the things you say and your tone of voice.

Address
Your address is also required, although most places will not go to too much trouble in order to confirm it. You typically do not need a utility bill or other documentation that confirms your address. This is mostly because they can easily do a skip trace on you with your SSN and get your most recent address. Child’s play really. But you will want to have an address ready for them and so you can put it on the application when you fill it out.

Pay Stub
This is one of the most crucial pieces of the puzzle, and you won’t get too far without it. This is how the lender confirms that you do indeed have a job, but it also shows them how much you make, and let’s them calculate how much you’re eligible to take out. Most payday companies have an equation that their computer runs that calculates how much money you can be lent, and still be able to pay back on your next payday.

Your Job is Your Collateral
Most of the time when people want money, they have to put up something of value to get it. This is true in the matter of home loans, car loans, boat loans, and even at pawn shops. The deal is if you don’t pay they come and get your stuff, reselling it in order to make good on the loan. So when you just want some money, but don’t have anything of value, or don’t want to put anything of value up for it, most lenders will turn their nose up at you.

But not payday lenders. They say that as long as you have a job, they’ll trust you enough to give you anywhere from $100 to over $1000 until you get paid again. They don’t care about your credit history, how long you’ve been at the job, or even if you’re good at your job. All they care about is whether or not you have a paycheck coming to you in two weeks or not.

If You Don’t Have a Job
There are ways to get a payday loan, even if you’re not technically employed. Government benefits serve as a form of regular income that can be used to get a payday loan. Just be sure to bring in your most recent benefits statement. You can even get a payday loan if you collect unemployment. Not all lenders will accept unemployment income for a payday loan, so be sure to call ahead so you don’t waste your time. If you are self employed you can get a payday advance as well, but you’ll have to bring in last year’s tax form so that they can calculate an estimate of how much you make monthly.

As long as you have a verifiable source of regular income it doesn’t hurt to call a payday lender to see if it qualifies for getting a loan.

Recent Bank Statement
No need to have shame about your account balance, or how you spend your money, the lender just wants proof that you have an open and active checking account so they have a chance to collect their money in case you don’t pay. You can bring in a statement that shows you have no money, even a negative balance with NSF fees, just as long as it doesn’t show that your account is closed.

Checkbook
Don’t forget your checkbook! You’ll have to leave an actual check written out for the amount of the loan plus the fee. This is so the lender has some form of restitution in case you don’t pay. It’s basically a backup form of collateral, and the lender knows that there’s a slim chance they will be able to collect from your check if you don’t pay the loan off.

Most people won’t have any trouble with this part, because as long as you return with the cash and pay off your loan, the check won’t get cashed, and gets returned to you. Those out there that don’t have a checking account will have trouble getting a payday loan. They won’t accept starter checks in most instances, but you may be able visit your bank and get a check drafted for the transaction.

How Payday Loans Work: The Process

Payday lenders are one-trick ponies. They only have one transaction, so it’s really easy to get used to it. These are the basic things you can expect to see when you take out a loan, how to repay it, and what happens if you don’t.

The Agreement
When they present you with the agreement, it will probably look rather monstrous, with lots of fine print. The fine print on the contract basically states that you will pay the money back on the date specified, and other stipulations that relate to what happens if you don’t pay the money back. Basically, if you intend to repay the money, there isn’t much verbiage in the agreement to worry about, especially if you’re doing business with a state-governed lender.

Paying Your Loan Back
This is where many of the differences between lenders comes up. Some lenders like to take the money electronically right from your account. Others like you to show up in person on your payday and bring the cash back. Each style can be good or bad, depending on how you look at the situation.

If you have to show up in person, you’ll have to pull out the cash from the bank and have it ready to repay it at the office. If your payday is on a Friday, like most people’s, you’ll likely end up waiting in line, with most people. This can be rather inconvenient, and put a damper on an otherwise joyous day. After paying the loan off, plus the fee, you’ll be given your now-voided check back and the transaction is complete until you go for another round.

If the lender opts for the electronic method you just have to make sure that there is enough in your account to cover the loan plus the fee. This can often be hard because there will be so many automatic payments set to go off on the same day that it’s just a matter of which transactions make it through first. It’s also hard to get paid and then watch it all get sucked form your account before you get a chance to touch it. Before long it dawns on you that there isn’t enough left over to make it until next payday, and you’re back at square one.

Re-Loaning
The way the payday lenders calculate how much you can borrow is set up so that they intentionally let you borrow more than you can afford to pay back. This sets up a vicious cycle of re-loaning that keeps you coming back to them for more. These companies know that while you might be able to pay back the loan plus the fee on your payday, before your next paycheck comes you’ll run short again.

There are some unfortunate payday loan customers that have ritualistically re-loaned every single payday for a year or more. There are also plenty of others that re-loan more often than not. Falling into the re-loaning trap is the absolute worst thing that can happen to you, but ironically it is how these companies make most of their bread and butter. If no one re-loaned they’d quickly go out of business.

Why Re-Loaning is So Bad
It may not be easy to spot at first, but the reason why it’s so horrible to re-loan the money is that it’s essentially the same money. Even if you don’t re-loan no one argues that payday loan fees are exhorbitant. However, you compound those rates and fees when you re-loan. If you take out $600 and pay about $70 to do so, and then end up taking the money out again on your next payday, it’s not a new $600 you’ve taken out. It’s the same money. It’s the original $600 even though it’s considered a new loan.

And you’ll end up paying another $70 on your next payday. You’ve now spent a total of $140 to borrow $600. Do this just 10 times – that’s just 5 months in a row – and you’ll have spent over $700 to borrow $600. That represents a staggering Annual Percentage Rate of 1400%. No one would ever knowingly sign on to this.

How to Break Free of the Re-Loaning Cycle
This is something that the payday loan companies don’t want you to hear. Many people get caught in the idea that they need to re-loan for the same amount each time they take out a loan. This is not the case. Every lender will offer degrees of loans, usually in $50 increments. Start weening yourself off. That’s the secret. Weening down is the most successful way to kick the payday loan habit for good.

You won’t even notice that you have fifty less dollars during the week or two until next payday. Keep weening down. It should get easier and easier as you go along because the fee you will be paying will be less and less each time as well. Soon your loan will be down to an amount that you can see yourself paying off all in one go. Do it! Now you’re free of the shackles and can get back to life as it was.

Payment Plans
Many states have instituted a payment plan that you can take advantage of if you are unable to make your full payment on the due date. This will usually come with an additional charge to get it started, and then they will break up your payment into 3 installments, each due on your next 3 paydays.

There are some benefits and drawbacks to these payment plans. If your loan is a small one, it might not make sense to pay the fee to join the repayment plan. However, if you loaned $400 or more it might make sense to buy into the installments and get out of the loan gradually. A bonus is that you get to push things to the next payday and nothing is due on the day you enter the program except for the fee.

This can be the solution needed for those that have habitually been re-loaning their advance for several weeks or months. By breaking up the payments into something more manageable, it lets you have something leftover on payday without re-loaning again. This is the very reason why states have made this a law in many cases.

What Happens If You Don’t Pay
Payday lenders claim that they are in the business of high-risk lending, and try to make it sound like many people welch on the deal. However, the statistics show that a large percentage of borrowers come back on their designated repayment date and pay the money as agreed. The small percentage that don’t eventually get collected on, and the small percentage of those that don’t get collected on, might go to court or just be written off. That small amount cannot justify the enormous fees they collect. Either way it’s good to know what to expect when you don’t repay.

Collection Methods
The first thing a payday lender will do when they get the inkling that you aren’t coming in to pay is try to beat you to the bank. This can literally mean that they will send one of their agents to your bank with your check so that they can try to cash it before you clean your account out. As soon as you miss your appointment time they will call the bank in order to verify the funds are in the account. If they get a yes from the bank off they will go.

The next step is to call you on the phone every day to try and get an idea of when you’ll be able to pay them back. They can only hold your check for so long, and state laws will require most lenders to deposit the check by a certain date, whether or not funds are in the account. This will likely cause you to get an NSF from your bank, and also an additional fee at the payday loan company.

If you submitted your bank account information electronically, and authorized the lender to debit your account for the amount of the loan on your payday, you better believe they are going to process it on that day, early in the morning. Depending on the lender, they may attempt to retry this transaction as many times as they are inclined, causing you to rack up NSF fees again and again, and causing lots of trouble at your bank.

Your Leverage
Although it may not seem like it, you do have some leverage when it comes to paying back your loan. For example, as long as there’s no money in your account, the lender can’t get the money out of it. In most instances, you can arrange to pay the loan off on your following payday, buying yourself an additional week or two, and trying to catch things up on your end. Many times there will be no repercussions to this, and the lender will allow you to re-loan after you pay the original loan off.

It’s always best to call them and let them know the situation. They will question you and urge you to bring in the money, but they can’t force you. Tell them your sob story and promise to pay them back when you think you’ll be able to, and try to keep your promise. Following their rules will typically not work out for you, as they are designed to be the benefactor here, so you have to adjust things to suit your needs, not bend to fit their needs.

So What Will You Do?
Hopefully you now have a better understanding of what to expect and what to bring with you when you go for a payday loan. Now that you know how payday loans work, and what sort of trouble they can bring, it’s up to you to decide what to do from here.

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