Payday Advance

Everything a Debtor Wants To Know About Payday Advances

A payday advance is a kind of unsecured loan which is short-term and of small amount. Actually, this type of loan need not be connected to the debtor’s payday. Most of the time, it is also referred to as a payday loan or cash advance. To be granted a loan, the borrower must show proof that he can repay the payday advance loan when it becomes due.

In the United States of America and in other parts of the world, a payday advance is controlled by law. There are US states which limit the interest rate charged on such loans in order to prevent any usurious transactions. Some creditors charge a $15 interest for a $100 payday advance which can result to an APR of 3686%. Lenders justify the high interest rates by saying that a payday advance has its risks. According to research, about 20% of total borrowers default on their loans which translate to 25% of the creditors’ yearly income.

How to Apply for a Payday Advance

The debtor must provide documentary proof of regular income. He may be asked by the lender to submit copies of bank statements or pay stubs. Although there are some creditors who don’t require proof of income, possible borrowers must still prepare it so that they can easily submit it when needed. Each lender has his own criteria in approving a payday advance. Since it’s only a short-term loan, the borrower must be prepared to pay the loan within the time prescribed.

Traditionally, the debtor must visit the office of the lender to apply for a payday advance. He submits a postdated check in the amount of the loan in full plus interests. At the end of the loan term, he must return to the lender to repay the amount owed. If he doesn’t return, the lender will encash the postdated check. In case the check is returned for insufficiency of funds, the debtor has to pay the bank the fee for the bounced check. Furthermore, the creditor will also charge additional penalties and interests on the unpaid loan.

Alternatively, the potential borrower can fill up an online payday advance application. Some lenders also accept applications through fax. Once approved, the borrower will receive the loan amount through direct deposit to his bank account. The payment for the loan is also electronically withdrawn when the payday advance becomes due.

Borrower Qualifications

The debtor must have a checking account. He must be able to show proof of regular income like bank statements or payslips. He must be at least 18 years old with a valid identification. Other creditors may ask for other requirements. They may set a minimum income amount before a borrower gets approved for the loan. They may also require a minimum length of service with the present employer.

Interest Rates and Finance Charges for Payday Advances

A payday advance charges hefty interests. In some cases, lenders can charge as much as 30% of the loan amount as finance charge. Being a short-term loan, the APR may reach about 800%. Lenders don’t usually perform credit checks on potential borrowers. Therefore, this kind of loan usually targets those individuals who have lower income and are currently experiencing financial difficulities.

Some of these borrowers don’t have money prepared to pay for the loan when it becomes due. They suffer more financial hardships because they have to pay the bank for bounced check charges plus more interests charged by the lender on the unpaid loan. Some of them find themselves trapped in a vicious cycle.

Depending on the lender’s underwriting criteria, a borrower may borrow as much as 30% of his gross income monthly. He needs to pay the loan plus interest on the next payday. The loan may be approved in just 15 minutes, especially if the borrower has complied with all the requirements.

What Happens If the Borrower Can’t Repay the Advance

It is the responsibility of the borrower to repay his loan when it is due. Most lenders will encash the postdated check if the borrower doesn’t return to repay his loan. If there is no sufficient funds on the borrower’s checking account, he will be charged hefty penalties by the bank. Also, the lender will continue to compute interest on the unpaid loan.

If the check is not funded, the bank will still try rerun the debit again and the borrower will be charged a bank’s fee again. If the loan remains unpaid, the borrower will surely be harassed by the lender through rude telephone calls either at home or in the office. The creditor will also call any of the character references the borrower has provided in the application form. If harassment doesn’t work, the creditor will hire the services of a credit collector who will further harass the borrower. If the loan can’t be repaid, the last course of action for the borrower is to file for bankruptcy.

What to Do If Borrower Can’t Repay the Loan

There are two things the borrower can try if he knows he can’t meet his obligations. First, he can try to negotiate with the lender for a new deal. Although there is a chance the lender won’t agree, it is still best to try. The first thing the borrower should do is to contact the lender and be honest with his situation. It is good to discuss why the loan hasn’t been paid on time. The borrower can suggest to trim down the loan balance to an amount the borrower can repay. However, it is important to note that the borrower can do this if he already has cash on hand to cut a deal. He may state that he may file for bankruptcy if he can’t settle the loan.

The second way is for the borrower to offer a different plan to repay the loan. However, he must ensure to repay the loan on its new terms. He must also keep communication lines open with his lender, especially if he has a problem with the new schedule of payment. If all else fails, the borrower can file for bankruptcy as a last resort.

US States Regulations on Payday Advances

The following US States regulate payday loans:

  • Georgia
  • New York
  • New Jersey
  • Arkansas
  • Arizona
  • Maryland
  • Connecticut
  • Massachusetts
  • Pennsylvania
  • North Carolina
  • Vermont
  • District of Columbia
  • West Virginia
  • Maine
  • Oregon
  • New Hampshire
  • Ohio
  • Montana
  • Colorado

US States Which Don’t Regulate Payday Loans

  • Wyoming
  • Wisconsin
  • Washington
  • Virginia
  • Utah
  • Texas
  • Tennessee
  • South Dakota
  • South Carolina
  • Rhode Island
  • Oklahoma
  • North Dakota
  • New Mexico
  • Nevada
  • Nebraska
  • Missouri
  • Mississippi
  • Minnesota
  • Michigan
  • Louisiana
  • Kentucky
  • Kansas
  • Iowa
  • Indiana
  • Illinois
  • Idaho
  • Hawaii
  • Florida
  • Delaware
  • California
  • Alaska
  • Alabama

Government Agencies Which Can Help Individuals With Financial Difficulties

  • The National Foundation for Credit Counseling
  • The National Consumer Law Center
  • Debtors Anonymous
  • Money Management International
  • The Federal Trade Commission
  • National Do Not Call Registry
  • Social Security Online

Alternatives to a Payday Advance

There are credit unions which can offer short-term loans with less interest. Some credit unions only charge an APR of 12% for a short-term loan. They usually offer a maximum of $500 loan amount to its members. The loan is usually tied up to a member’s cash account which usually deducts automatically 5% of the loan amount as amortization for the loan on a monthly basis.

Borrowers can also avail of small bank loans. Today, US banks offer up to $1,000 loans with an APR of 36%. A typical loan of this type has a longer term than a payday advance. This FDIC Small Dollar Loan Pilot Program is available in Wisconsin, Texas, South Dakota, Oklahoma, North Carolina, Nebraska, Missouri, Minnesota, Massachusetts, Louisiana, Illinois, Kentucky, Kansas, Georgia, Florida, Delaware, and California.

Borrowers can also seek credit counseling. There are a number of consumer credit counseling programs which can help find solutions to their financial problems so that there’s no more need to avail of payday loans. The National Foundation for Credit Counseling through its affiliates, has free money management seminars which debtos can attend. Affiliates offer rent delinquency counseling, mortgage default counseling, debt management planning, and budget counseling.

Borrowers can also try asking friends and families for financial help. They can also negotiate with their creditors. Some borrowers can also try availing of credit card cash advances instead.


February 2018
« Jan    


Short term loans like payday loans attract higher interest rates. This site contains general information to allow you to understand the pros and cons of payday loans. Any information on this site is not to be construed as financial advice. Each person needs to consult professional advice before borrowing money to ensure their personal circumstances are taken fully into account.