An advance payday loan is a short-term cash loan that is usually based on your personal check, which the lender holds for future deposit. In some instances, the lender requires electronic access to your bank account. A cash advance loan is also referred to as a payday loan, cash advance loan, or check advance loan.
What is a Advance Payday Loan?
When applying for a loan from a bank or other similar financial institutions, the requirements likely include a minimum credit score. If you have a low credit score, you may not be able to get the loan.
Unlike the bank loans, advance payday loans typically have less strict credit score requirements or none at all. That makes these loans far more accessible to many people who can’t qualify for conventional loans. However, these payday loans come with various costs and conditions that you need to consider before taking this option.
To get such a loan, you generally have to write a check dated for your next payday and made out for the amount of the loan, including interest and fees. The lender can give you cash or transfer the money to your bank account as soon as you provide the check to them.
Since a cash loan typically doesn’t have specific requirements on its use, you can spend the money on various types of expenses. When your next payday arrives, the lender cashes your check and withdraws the loan amount, interest, and fees from your bank account.
How Does an Advance Payday Loan Work?
With cash advance loans, borrowers may either write a personal check for repayment or sign over electronic access to their bank accounts to lenders. Lenders provide the loan based on your income and credit profile.
The lender charges a high interest rate for short-term, immediate credit. The amount offered is usually a portion of your next paycheck. Repayment is typically a lump-sum of the amount borrowed, plus interest and fees.
Each state where payday loans are available sets specific limits on:
- The costs of payday loans (interest and fees)
- A borrower’s maximum number of total loans
- Allowed number of loan renewals
- Extended repayment plans
State regulations also specify collection limits (including fees that lenders can charge if borrowers don’t repay the loan) and possible legal action when borrowers can’t repay.
At the time of loan repayment, borrowers usually have three main repayment options:
- Redeeming the check by paying the loan in cash
- Allowing the lender to deposit the check
- Paying a finance charge to roll the loan over for another pay period
In some cases, lenders may offer longer-term payday installment loans. With your authorization, they will electronically withdraw multiple payments from your bank account on several future payment dates.
What is the Cost and Loan Amount of an Advance Payday Loan?
Payday loans are subject to the federal Truth in Lending Act. That means that lenders must disclose the full cost of an advance payday loan to borrowers. Lenders must inform you of the finance charge (a dollar amount) as well as the annual percentage rate (APR — the annual cost of credit) before you sign up for a loan.
The APR shows the overall cost of your loan and it’s based on several things, including:
- The loan amount
- The interest rate
- Related fees
- The duration of your loan (loan term)
Depending on your specific state’s legal requirements and restrictions, a payday loan may range from $100 to $1,000. The average loan term is usually two weeks, and the typical APR is roughly 400%.
The standard Finance charge for a payday loan ranges from $15 to $30 when borrowing $100 for two weeks, which is an APR range of 390% to 780%. Shorter-term loans tend to have higher APRs, and rates are higher in states without caps on the maximum cost.
Ultimately, cash advance loans offer simplicity of borrowing and quick access to cash, especially if you have little or no access to conventional credit.
How to Apply For an Advance Payday Loan
You can find payday loan providers in physical locations for onsite credit applications and approval. They are typically small credit merchants, payday loan stores, or stores that sell other financial services like check cashing, rent-to-own, title loans, and pawn services. The type of lender you find depends on state licensing requirements. Some advance payday loan services are available through online lenders.
In order to qualify for a payday loan, you normally need to have:
- An active bank, prepaid card, or credit union account
- Proof of income (pay stubs from your employer to show your current level of income, or another income source)
- Valid identification
- A minimum age of 18 years (or 19 in some states)
Proof of your income is important since payday lenders often base the loan principal on a percentage of your predicted short-term income. The lender essentially uses your wages as collateral for the loan. Several other factors may influence the loan terms offered by lenders, including your credit score and credit history.
The states where storefront payday lenders can operate and how they operate depends on the specific state’s laws and regulations. Online payday lenders are generally subject to state licensing laws and rate caps in the specific state where borrowers receive the loans.
Who Can Apply for an Advance Payday Loan?
Payday loans are generally accessible to most people. The main exceptions are people aged below 18 years old (or 19 in some states), as well as service members and their dependents. Under the Military Lending Act (MLA), active-duty service members and their dependents cannot access payday loans.