Payday loans are ideally used for short term emergency expenses, including paying urgent household bills, repairs, car fixes, medical bills, paying rent and even paying off other pressing debts. Because of the expensive nature of these loans, payday loans are not designed for frivolous or unnecessary spending and should only be used if you need urgent access to funds.
Instead, the concept is that you receive the money upfront to help pay off your immediate pressing bill, and then you can receive you pay check from work at the end of the month and pay off the loan. And that is the ideal purpose of a payday loan!
- Payday loans should be used in unexpected and urgent circumstances.
- Borrowers typically take out loans to cover medical bills, or car and home repairs, when they don’t have sufficient money in the bank.
- The most common users of payday loans are those between 18-24 years of age.
- The average loan in 2021 was $375.
- Payday loans are used in the 37 states which they are authorized in, with California being the most popular state for lenders to operate in.
What Exactly Is A Payday Loan?
A payday loan is a type of short-term loan which is designed to tide you over until your upcoming payday, in the case of an unexpected bill or financial emergency. Therefore, you should only apply for what you should receive in the upcoming weeks, whether it is from employment or an alternative form of income.
A payday loan is only supposed to be used in emergency circumstances and is designed for those who live on a month to month basis and have no access to savings. This type of loan typically has a high interest rate and therefore should only be used as a last resort in the short term.
What Are Payday Loans Used For?
Payday loans are used to finance emergencies, and are most popular amongst young adults between the ages of 18 and 24. They are typically used to cover costs such as:
- Car repairs
- Paying rent
- Urgent household repairs, such as plumbing or electricity or heating problems;
- Unexpected medical bills or veterinary bills
- Funeral expenses
Payday loans are designed to give borrowers access to instant funding if they do not have enough money to last until their upcoming payday. Payday loans should be used in times of urgency, for example to cover emergency medical bills, finance funerals, fix broken down cars or repair boilers.
This type of loan should not be used for any unnecessary spending and should not be used to pay off alternative debts.
How Can I Apply For A Payday Loan?
In order to apply for a payday loan, you will only need a valid ID, bank account and verifiable source of income.
The lender will be required to verify the income in order to approve a loan. If there is no evidence that you will receive income within the coming weeks, the lender will not be able to provide any access to funding.
The lender will also need to ensure you have a valid bank account under your name in which they can deposit the funds, and you will also be required to be over the age of 18.
How Much Can I Borrow With A Payday Loan?
The amount of money which can be borrowed as a payday loan typically varies between $300 and $1000 but can differ from state to state. In addition to this, the amount a lender can borrow can also vary based on their financial situation.
The majority of states which permit payday lending have a cap on the amount which can be borrowed.
Some lenders will take into account how much a borrower earns in order to assess how much they are willing to lend. Other lenders will not do this and leave borrowers at risk of not being able to repay their loan, leaving them with higher interest rates and excessive debt as the loans roll over.
Some states, such as Arkansas, Arizona, New Mexico, North Carolina, Georgia and Washington DC do not permit payday loans at all due to the high risk that borrowers will not be able to repay the amount due.
When Do I Need To Repay My Payday Loan?
If you take out a payday loan, you are expected to repay it in line with your upcoming payday. When you receive your monthly income, you will be required to repay the loan in full alongside the fee for borrowing the money.
If the loan is not repaid in line with payday, the payment will roll over into the next month with additional fees for late repayment. This means that a payday loan is not supposed to last you more than four weeks, when it should be paid off with your monthly income.
Not repaying your payday loan on time can incur late fees, added interest and a negative impact to your credit score which may impact your ability to access other types of finance in the future.