Rollovers

Many payday lenders give borrowers the option to rollover their loan.  This means that they will be able to carry the loan until their next payday.  Of course, the lenders don’t offer you this service out of the kindness of their hearts!  You will usually have to repay any loan fees plus pay the high interest on the original fees and accumulated interest.  With some lenders, the interest rate (which is already high for payday loans) will increase for rollovers.  You should always avoid payday loan rollovers because it will end up costing you a lot more than you originally calculated.

Many states have set laws protecting borrowers from getting into large debt by frequently rolling over payday loans.  The laws prohibit or limit the number of rollovers which a lender can offer.  Be sure that you know your state’s laws before taking a payday loan.

Default

If you have exhausted your rollovers and still can’t pay off your payday loan, then your loan will go into default.  The first thing which will happen is that the lender will try to cash your postdated check (or withdraw the money from your account).  Without sufficient funds in the account, the check will bounce.  You will then be stuck with a fee from your bank as well as the payday loan amount.

It usually doesn’t take long before the lenders starts sending mails and calling to collect their money.  They will almost immediately contact the credit bureaus to report your late payment.  If you have longstanding good credit, then this one default shouldn’t affect it too much.  But, if your payday loan stays unpaid for a long time, it could devastate your credit score and make it impossible for you to get other loans.

After a payday loan has been in default for a very long time, your loan will usually get sold off to a credit collection agency.  If this happens, it will really destroy your credit score for at least 10 years. In some states, lenders are allowed to sue or take other legal actions against people who fail to repay their payday loans.  Again, this is why it is good to know the laws in your state before taking a payday loan.

When used responsibly, a payday loan is a great way to get over an immediate hardship or unexpected expense.  But never take out a payday loan if you think you may not be able to pay it off in full at the end of the term because it could end up costing you a lot!

What is a Rollover?

“Rolling over” on a payday loan basically means that you are extending your loan (usually until your next payday).  This gives you more time to pay off the debt amount, but it also will increase the amount of the debt significantly.  When you rollover on a payday loan, you will usually have to pay any fees again.  You will also have the accumulated interest and fees added to the loan amount then have to pay interest on this new, higher total.

To protect borrowers from getting into large debt, many states have set laws prohibiting rollovers.  Other states permit rollovers but have limits to how much more interest can be charged for rolled-over debt.

Avoiding Rollover

The best way to avoid rolling over on your payday loan is to never borrow more money than you can pay back.  It isn’t always easy to calculate what you can actually afford though. That is why you must do some careful planning before you take out a payday loan.

Firstly, don’t let your current desperation for money put you into a more desperate situation in the future.  Take comfort in the fact that a solution for your problem is available – stressing over the problem is just going to make it worse.

Once you have a cool head, calculate all of your expenses realistically.  You should factor in the vital things like food, utilities, rent, and loans.  Then, calculate your income.  If your income can’t cover the expenses, then a payday loan is not going to help you – it will just make a bigger income gap in the very near future.  Try to find ways to cut down on your expenses.  This can mean canceling your mobile phone service for a few months, packing your lunch instead of eating out, or biking to work instead of taking the bus. Only once you’ve gotten your income-expense to a balanced ratio can you even consider taking out a payday loan for the immediate expenses.

Look at all your various options for payday loans and calculate how much it is going to cost you.  Now, recalculate your income-expense ratio to see if it is still balanced.  Payday loans are short term loans so you are going to have to account for this loan amount very quickly (usually within 14 to 30 days).  You will not have the flexibility which normally comes with long-term loans to spread the payments out as your money becomes available.

If you are worried that your next paycheck won’t be enough to cover the loan amount and your daily expenses, see if you can’t take out a smaller loan.  For example, ask your car mechanic if you can’t pay part now and the rest later instead of going for a big payday loan at once.  You’d be surprised how easy it is to negotiate payments, especially since we are all going through the same financial crunch of the recession together!

Applying for Payday Loans and Credit Score: You can generally apply for any loan without it affecting your credit score.  There are exceptions to this though.  For example, if you apply for numerous loans at once, the credit bureaus will see that numerous agencies are looking into your credit at once.  This is a red flag for them and they may drop your credit score.  With payday loans, this isn’t usually an issue because a credit check is not always ever required.  You should still never apply for numerous loans at once though; just apply for the loans which you really are serious about.

Having a Payday Loan: Contrary to common belief, just having a payday loan is not going to negatively affect your credit.  It is what happens after you get the loan which can affect your credit!

Reporting to Credit Bureaus: Your actions as a borrower will be reported by the lender to a credit bureau.  If you pay the payday loan off on time according to the terms, then this will have a positive impact on your credit score. If you fail to pay off the loan, this can negatively impact your credit.  For borrowers with solid credit, a small hiccup in paying back the payday loan isn’t going to take a major toll.  However, if you default on payment or your loan gets reported to a collection agency, it can have a negative impact for over 10 years.

Using Payday Loans to Rebuild Credit: Responsible borrowers can use payday loans to build or rebuild credit.  However, payday loans are not going to have a major positive impact on your credit score.  To understand why, you will have to understand a bit about how the credit bureaus calculate your score.

The bureaus look at your entire history of paying off loans and bills to determine whether you are a risky borrower or not.  They don’t just want to see your behavior over a short period of time (such as with payday loans), but a long time.  For them, regularly paying off a mortgage loan for 20 years is going to mean a lot more than paying off a small payday loan once.  By the same standard, failure to pay a short term loan is looked at much more negatively than missing one mortgage payment in 20 years.

• Always make sure that you understand the full terms of the payday loan.  Even if you don’t think you will default on payment, make sure to read the terms for default (or late payments and rollover). Responsible borrowing means considering the worst possible situations and being prepared for them!
• Don’t use a payday loan to pay off other debts.  Using loans to pay for debts will just get you further into debt – especially at the interest rates of a payday loan!  Only use a payday loan for paying debts if it is economically smart to do so.  For example, let’s say that you have fallen way behind on your electric bill and it is due to be shut off if you don’t pay by a certain date.  Electric companies will usually charge a very high fee for turning the electricity back on.   If these fees are higher than the payday loan fees, then it would be a good choice to use the loan to pay off your electric bill debt.
• After getting a payday loan, many borrowers go on with their lives as normal, forgetting that their next paycheck is not really theirs (or at least part of that paycheck).  Make sure that you make a financial plan which calculates the cost of the payday loan into the budget.  Add up all of your expenses (bills, rents, food, gas, etc.) and then compare this to your income after the debt amount has been paid.  If your expenses are greater than your income, you will just get put into further debt.  Find ways to cut back expenses so your income will meet your expenses.
• Short-term loans like payday loans are not meant to be used for long-term problems (like debt gone out of control or being unable to meet your daily expenses with your current income).  Be realistic when taking out a payday loan or it will just add to your problems.
• Do your research before taking a payday loan.  Foremost, you should make sure that you are choosing a reputable lender for the loan.  Then look at all the different aspects like fees, APR, rollover plans, and repayment options.  You will also want to look at your state’s specific laws about payday loans to make sure that the lender isn’t charging over the legal maximums.
• Don’t forget that a payday loan holds just as much weight as a bank loan.  If you don’t pay off the payday loan as agreed upon, it will harm your credit score.

• Reputation of lender: The most important thing to consider when choosing a payday loan is the reputation of the lender.  There are still some unscrupulous lenders out there who will try to scam you or take your money through up-front fees.  In rare cases, you might even come across some identity thieves when applying for a payday line.  Only take a payday loan from a lender which has been in operation for at least a year (the longer the better), has contact information, and ideally has some form of live customer support. Read reviews of payday lenders to see if any customers had problems with that lender.
• Finance Charges (APR): Most payday loans will list their interest as a finance charge.  However, it is often difficult to understand the true cost of the loan just by these charges.  Instead, you should compare their APRs (annual percentage rate).
• Loan amount: Almost all states have legal maximums for payday loans.  In most cases, this amount is $500.  Some lenders will only offer smaller loans though, such as $100 or a certain percentage of your monthly wage.
• Repayment: It is very important that you read through all the terms of repayment and make sure you understand them.  Each lender can vary on these terms and it can make a big difference to how much you end up paying in the long run.  For example, some lenders will set an exact date for repayment whereas others will be flexible.  You may be allowed to extend your loan for free or new charges may apply for extension.  Always consider the terms under the worst possible scenario – such as what will happen if you can’t repay your payday loan right away.
• Eligibility: Each payday lender will set its own standards for eligibility.  In most cases, it is very easy to get a payday loan but you may be required to show certain documentation or meet certain criteria.  If you can’t meet this criteria, then do not apply for the payday loan.
• Other Fees: Always be on the lookout for any other fees associated with the payday loan.  For example, you may be required to pay $5 for the ID check or employment verification.  Avoid any lenders which make you pay these fees up front.  Make sure you understand what the fee structure is for late payments, extending the payday loan, or any other possible scenarios.  If a payday lender doesn’t openly list its fees, then you should move on to another lender.  There are plenty of options online for payday loans so there is no reason to choose a lender which isn’t forthcoming!

A payday loan is considered a loan by the same standards as a mortgage, student loan or car payment. Your repayment of a payday loan will get reported to the credit bureaus just like with these other loans.  If you pay off your payday loan on time, then it will improve your credit score.  Do note, however, that a payday loan is not going to carry the same weight as paying off another type of loan, such as a mortgage. This is because older loans (ones which last for long periods of time) are a better indicator of your ability to responsibly pay off debt on a regular basis.  A few payday loans are probably not going to get your destroyed credit score anywhere near the level needed to qualify for most loans, but every little bit can help after filing for bankruptcy.

Contrary to common belief, taking out a payday loan will not adversely affect your credit history.  What happens after you get a payday loan can have an effect on your credit score though – including making your already poor credit even worse.

Payday loans are notorious for having very high interest rates as well as fees. For people who have a history of bankruptcy from failure to pay off debts, taking out a payday loan can be especially risky.  Before you put yourself in a situation where you could get into more debt, always make sure that you really need the loan and that there are no other options available to avoid more debt.

Be especially cautious if you are going to take out payday loan to pay off other debts.  In most cases, this is a very bad idea because the interest on the payday loan will take a quick toll, as will any late fees. You should carefully calculate the costs of the payday loan and determine whether they are practical for your situation.  For example, if you have a final notice bill for your electricity and it will cost you $100 to turn the electric back on, then the fees for a payday loan may be worth it because they are less than $100.

As with any loan, you should always make a budget plan before taking out a payday loan.  Be sure you can return the amount in full on payday or your credit score will suffer even more.

Asking for fees up front: Watch out for any payday lenders which ask you to pay fees up front.  Usually, this will be done in the form of an application fee and then your application will be denied (they basically take your money and run!).  Some other payday lenders are a bit trickier.  They ask for the lending fees up front, which seems illogical but is really a ruse to make you pay more. Let’s say that you need $300.  If the lender requires you to pay $30 in fees up front, then you will actually have to take out a loan of $330 just to cover the fee amount!  Then you will lose more money by paying interest on this additional $30.

The rates seem unbelievably low: If something seems too good to be true, then that is probably the case.  Make sure you do some shopping around before you choose a payday lender so you know what to expect and what is realistic. If the rate is very low, there are most certainly some other fees hidden which can take a major toll on you later.

The lender asks certain questions: Be wary of identity thieves posing as payday lenders!  This won’t happen at established payday loan websites but could happen at newly-established sites (the thieves will open a website for a few days, collect information, and then move on so they cannot be traced).  Watch out for any payday lender which doesn’t ask into your employment history but is very interested in you SS number and bank account details.

There is no contact information: All payday lenders should provide contact information including an address, name, and phone number (you may have to ask for the phone number).  Check with an online map or address directory to make sure that the address really exists and is what it says it is (like the address isn’t located somewhere in the Hudson River!).

The lender doesn’t disclose all information about the payday loan: Under the Truth in Lending Act, all lenders must disclose all information about loans.  Your payday loan contract should have all terms listed including APR, fees, and default payment terms.   If you can’t find this information given openly, then move on to another payday lender!

But what about those people who are in desperate need of some fast cash?  The immediate need for a payday loan could easily outweigh the longer-term costs.  For example, let’s say that you run a delivery service and your car breaks down.  You need $300 for repairs but have no means of getting this money – credit cards, pawnbrokers, and family members have already been exhausted as resources.  If you don’t fix your car, it is going to cost you a lot more in lost income so paying the costs of a payday loan would be worth it.

Payday loans is that they are really only designed for those in desperate situations.  Most states limit payday loans to $500, which is a paltry sum compared to what banks will generally loan.  If you can’t come up with $500 through any other means and are considering a payday loan, then this would certainly qualify as “desperate.”  People in desperate situations often make reckless decisions: they don’t bother to read all the terms of the payday loan or calculate how much the payday loan will really cost.  They also are probably so focused on the immediate need that they forget to make a long-term money management plan.  Without this sort of advance insight and planning, the payday loan interest is likely to take a massive toll.

Most payday lenders operating out of storefronts will offer interest rates of 455% plus about $15 to $18 per each $100 which is loaned.  If the payday loan isn’t paid off in the agreed-upon term, then even higher fees and interest rates could apply.  With these sort of rates, it is easy to fall into a downward spiral of debt from one small payday loan.

Luckily, borrowers do have many more options available to them today.  There are now many reputable payday lenders online.  Because of all the competition between the lenders, it is possible for borrowers to find more favorable interest rates and lower fees.  Online debt calculators also make it easy to figure out how much the payday loan is really going to cost you.

Here are some things to consider to determine whether a payday loan is worth the high interest:

• Do you really need a loan?  What will happen if you don’t get the loan amount?
• Are there any other options, like taking a loan from a credit card, friend, or pawnbroker?
• How much will the payday loan really cost me?

Most importantly, don’t ever let desperation cause you to make foolish decisions.  Take your time, do your research, explore your options, and then pick the best payday loan for your needs.

States where payday loans are illegal: Arizona, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, Washington DC, West Virginia

Note that these states will still permit small loans and these loans will have their own specific regulations and procedures.  However, borrowers will not be able to take out loans on their paychecks.

States where payday loans are legal

In states where payday loans are legal, there are almost always strict regulations which the lenders must follow.  These regulations will cover:

• maximum amount that a loan can be
• minimum and maximum duration of the loan
• maximum rate and fee amount
• maximum APR
• number of rollovers permitted (if any)
• number of outstanding loans allowed at once
• collection limits
• whether criminal action is permitted for outstanding loans
• How long individuals must wait until they can take out another payday loan

You will have to contact your state’s financial institution regulator in order to find out the specific payday loan laws.  In general, you can expect these standards in almost every state:

• Maximum loan amount of $350 to $500; some states also put limits by percentage of monthly income (usually 20-25% of gross monthly income)
• Loan duration for at least 7 days and up to 40 days
• Finance and fee amount is usually set as a percentage (typically about 15%) or a percentage plus a maximum fee amount
• APR typically ranges from 390% to 650%
• Usually 1 rollover is permitted
• 1-3 outstanding debts allowed at once

If you find out that your payday lender has been charging you more than your state law allows, then you will not be responsible for paying any amount above the limit.  If payday loans are illegal in your state, then you will likely only be responsible for the capital amount and no interest fees or other fees.  However, trying to sort out these legalities after the fact can be very complicated and onerous.  Instead, it is best that you inquire into your state’s specific payday loan laws in advance to avoid any potential complications.

Applying for a Payday Loan

In the past, most payday lenders were located in storefronts.  Now, most companies offering payday loans are located online.  This helps them cut back costs so they can theoretically pass the savings onto customers.  The process for applying for a payday loan is usually very simple.  You will have to provide some basic personal information, proof of ID, and probably also proof of employment such as with pay stubs.  Some payday lenders don’t require you to show proof of employment for small short-term loans.

If the payday loan is approved online, the funds will be transferred into the borrower’s bank account via direct deposit.  In some cases, other payment methods are also available, such as wire transfer.

Repaying a Payday Loan

When taking out a payday loan in person, you will generally be required to write a postdated check for the amount of the loan.  The lender will then cash this check on the agreed-upon date.  If the borrower does not have funds in his account by then, he will still be responsible for the loan amount and may also have to pay check bouncing fees from his bank.

For paying back online payday loans, the borrower usually has to give account information.  The loan amount will be directly withdrawn from the borrower’s bank account on the agreed-upon date.

The Pros and Cons of Payday Loans

Payday loans are often criticized as targeting low-income communities and draining them of their resources with high interest rates.  However, payday loans may be the only option for these people as they are often ineligible for standard bank loans.  When paid off on time, the high interest rates of payday loans may be well worth the fee.  However, if borrowers get behind on their debt or perform several “roll overs”, the costs of payday loans can take a quick financial toll leading to poor credit and debt.