Let’s take a look at how a rollover payday loan works:

• David takes out a payday loan of $300 to cover a high gas bill until next week’s paycheck comes. The loan has a fee of $75 ($25 for each $100).
• Payday comes and David doesn’t have enough to cover the total costs of the loan ($375).
• David asks the lender for a rollover.  The new loan is now for $375 plus a higher fee for the rollover of $120.
• David now must pay $195 to borrow $300.  If he cannot pay off the payday loan in full at his next payday, he will end up paying even more.

Before taking out a payday loan, it is incredibly important that you understand how much it is going to cost you at minimum as well as how much it could cost you.  Even if you think that you will pay off the loan on time, there are always unforeseen circumstances which may prevent you from doing so.

To avoid getting stuck in rollover debt, it is important that you make a financial plan which ensures that you can pay off the payday debt in full the first time around!  You will need to carefully add up all of your necessary expenses and also locate areas where you are spending unnecessarily.  Cut out all unnecessary expenses until the payday loan is paid off in full.  If you have other debts and bills, it is important to evaluate each of these individually and prioritize which ones need to be paid off first. You don’t get much leeway with short-term loans like payday loans so you’ll have to start budgeting right away.  With extremely few exceptions, you should never use a payday loan to pay off other debt.

Payday loans are meant to be short-term solutions for financial difficulties. If your money problem is originating from long-term problems, then a payday loan is just likely to push you into a rut of rollover costs.

How Your Credit Score is Calculated

In order to understand the effect that a payday loan will have on your credit score, you first need some basic information about how your score is calculated.

Your credit score, or FICO score, is given as a number ranging from 300-850.  Anything below 499 is considered very bad credit.  If you have filed for bankruptcy or have bills which went to collection agencies, you may be in this bottom rank.  Most people have credit scores between 600 and 800. There are five major categories which determine your credit score:

• Payment history (35%)
• Amount owed (30%)
• Duration of credit history (15%)
• New credit (10%)
• Type of credit (10%)

The credit bureaus do not disclose the exact way that they calculate your credit history but positive and negative actions on your behalf will all get factored into the score.  Most of these categories are pretty clear, but you need to remember that we are looking at your history as a whole, not just on a per-action basis.  For example, if you had a 25-year mortgage loan and regularly paid it every month but missed one payment, it probably isn’t going to harm your credit score at all.  But if you default on a payday loan of 30 days, then it will have a harmful effect.

Note that “new credit” accounts for about 10% of your credit score.  New credit includes the number of new loan accounts you’ve recently opened and the number of credit check requests recently performed. If you take out 5 different payday loans at once, it will be an indicator that you are in financial hard times and will negatively impact your credit score.  Note that most lenders do not require credit checks for a payday loan. However, if you apply for several loans which do require credit checks, then the sudden surge of activity will also indicate financial hardships.  Try to wait several days or weeks between applying for loans which require credit checks.

Pay Off In Full and On Time

A payday loan isn’t going to make a massive impact on your credit score because it is just for a short term and a small amount.  For people with poor credit scores though, this little bit can go a long way to establishing a good credit score.  Make sure that you are not taking out more than 1 payday loan at once.  Remember: just as a payday loan can help rebuild your credit, it can also take a toll on your credit score very quickly!  Always pay your payday loan off in full on time if you want to keep boost your credit score.

Payday Loans Don’t Require Credit Checks

Payday loans are considered a loan just like taking a loan from a bank.  However, because the structure of these loans is different, they rarely will require a credit check to qualify.  A payday loan is just for a short period of time so the lender isn’t as interested in your history of paying off debt.  Even though payday loans are considered “unsecured” (no collateral), one could think of the borrower’s next paycheck as a form of collateral. Thus, the lender isn’t just relying on the borrower’s promise that he will pay back the loan amount.

To be eligible for a payday loan, you will likely have to provide proof of income.  This can be in the form of paycheck stubs, a disability check, social security check, or similar.  In some cases, payday loans can be obtained without any proof of income.  However, these payday loans may have unfavorable rates and be offered by unscrupulous lenders.  If a payday loan is too easy to get or seems too good to be true, do your research to make sure that the lender is registered and legitimate.

Payday Loans Still Affect Credit!

Just because you don’t need a credit check for a payday loan, it doesn’t mean that the loan isn’t going to affect your credit.  Your behavior as a borrower gets reported to credit bureaus in the same way that a car payment or mortgage will get reported: if you are responsible, then the payday loan will actually improve your poor credit.  If you are late or default on payment, then the payday loan can destroy your credit score.

Even if you already have poor credit, it is still important to be responsible when taking out a payday loan.  Adding another late payment to your credit history is just going to make it harder for you to get into good graces with the creditors again.  And until you get into good grace, you aren’t going to be able to get any loan which has more favorable rates than a payday loan!

Before taking out a payday loan, you should make a careful budget plan to ensure you can pay back the loan amount in full on the date it is due.  Always try to get the longest loan period possible.  Even if that means you will have to pay more in initial fees, it will end up being cheaper than having to pay late or rollover fees later on if you can’t pay on the deadline.

Illegal Payday Loans

If the payday loan was given illegally, you will still likely have to pay off at least the principle amount.  You could possibly get out of paying the principle amount too, but this will likely take legal action with the help of a lawyer.  In short, the costs (plus time and hassle) of getting out of the principle loan amount simply aren’t worth it.

When taking a payday loan at a storefront, you aren’t likely to run into legal issues.  However, the internet is a completely different realm – especially since many payday loans are given across state borders. It is wise to know your state laws on payday loans before taking any loan.  While you may not be responsible for interest, it can cause you a lot of hassle trying to get out of the loan.

Unregistered Lenders

Even if payday loans are permitted by law in your state, the payday loan may still be illegal because payday lenders must be registered.  If a lender is not registered, then you typically will just have to pay back the principle amount.  However, just like with the state-prohibited payday loans, it can be a major nuisance trying to get out of paying the interest.   Some states have set up laws to protect borrowers from illicit payday lenders.  For example, the Utah law HB459 was passed and gives borrowers the legal right to stop payments on payday loans if the lender is not operating under the law.

What to do if you have an illegal payday loan

If you find out post factum that payday loans are not permitted in your state or that your lender is unregistered, here are the steps you should take to protect yourself:

1. Go to your bank and speak with a manager about the situation.  Tell the manager that you want to revoke ACH (withdrawal) authorization from the lender. You will likely have to fill out paperwork reporting fraudulent activity.  For extra security, it is best to completely close your bank account and open a new one.

2. Send a letter/email to the payday lender saying these things: you have found out that payday loans are illegal in your state and/or that the lender is not registered; you have already paid off the principle on the loan and are taking about ACH authorization from them (in case you haven’t yet repaid the principle, inform the lender that you are willing to do so but on your own conditions); asking for an email confirmation that no more funds will be withdrawn from your account; ask for a refund of any interest you paid (the refund check should be sent to your address and do not cash it in your bank account because this will give them information about your new bank account!)

3. Send complaint reports to the Federal Trade Commission and the financial regulation committee in your state.

How do you go about consolidating payday loans?

The first step to consolidating payday loans is to calculate all of your outstanding unsecured loans.  Then, you will want to contact various debt consolidation companies and take advantage of their free debt advice sessions in which you can figure out your options.  Once you choose a consolidator, he or she will negotiate with the lenders on your behalf.  Consolidators are often very effective in getting reduced rates on the payday loans or extensions (not just rollovers).  A consolidator will also be aware of certain legal limits on payday loans in your state and make sure you are not paying more than you are required to.

Your consolidator will then be able to make a new, single payment plan for you.  Instead of having to write out multiple checks or have calculate multiple monthly deductions from your banking account, you just pay one fee per month.  It is much easier to pay off loans after they have been consolidated and you can often save a substantial amount of money.

Extender Payment Plans

People living in these states have the option of taking out an extended payment plan: Alaska, Alabama, Florida, Illinois, Michigan, Oklahoma, and Washington. An extended payment plan allows borrowers to repay the amount in installments over a longer period of time.  The mentioned states all have laws which specifically allow these plans in order to help borrowers who have maxed out their rollovers and cannot pay back the loan.

What if your Payday Loan is already taken by a Collection Agency?

If you default on  your payday loan, it may be handed off to a collection agency.  The collection agency can use legal means, such as lawsuits, to get you to pay back the loan.  It is important to realize that collection agencies are only allowed to pursue you for a limited amount of time as defined under the Statute of Limitations (SOL).  If the SOL is expired, then the collection agency cannot garnish your wages.  You can find out if the SOL is expired by asking them to send you a send you a validation of your debts. Don’t repay any debt on the loan after it’s gone to a collection agency without first checking the SOL; the SOL is renewed when you begin paying.

If the SOL is still valid on your payday loan, then you may consider payday loan debt consolidation as an option.  The same standards apply to debts at a collection agency as those which are not yet in default. The only difference is that the debt consolidator will perform negotiations with the collection agency instead of the payday lender.

• Who is the lender? It is very important that you don’t get suckered in by promises of low costs and end up choosing a dishonest payday lender. Always make sure that the payday lender has been in business for at least a year (the dishonest lenders get taken down within weeks usually) and read reviews to hear about other borrower’s experiences.  The payday lender should always have an address and contact information.  Don’t hesitate to get in touch before you apply for the payday loan
• Finance charge: The “finance charge” is the cost of a taking out the payday loan.  It can be difficult to interpret the real costs of the loan because it may be broken up into fixed amounts per $100 plus fees.  Rather than trying to make sense of these costs, you should look for the APR.  APR (annual percentage rate) is essentially the same as the finance charge but given as a single percentage and makes it easier to compare loans.   In the US, the average APR for payday loans is 455%.
• Maximum loan: In almost every state where payday loans are permitted, there are regulations limiting how much lenders can give.  Usually, it is $500 or a certain percentage of the borrower’s monthly gross income. Don’t just assume you will get this amount though.  Some lenders will put their caps at much lower amounts.
• Terms for repaying the payday loan: You should be very careful about reading and understanding the lender’s terms for repayment.  In most cases, you will be expected to return the payday loan in full on the set date.  However, you may also have the option of rolling over the loan (which is not the same as an extension because you must repay all fees).  A few lenders will let you repay part of the payday loan and rollover the rest.  You should never take out a payday loan if you don’t think you can pay it back on time – but it is still important to consider the worst case scenario and know your repayment options.
• Speed and ease: Getting a payday loan is much easier than getting a bank loan or even credit card.  But you will still want to make sure that the payday lender is convenient for you to use.  Look at what bank transfer options are given and how you are expected to prove your identity.  It never hurts to get in touch with customer service; the best payday loan lenders will have a staff ready to help you through the process.

Applying for a Payday Loan

One of the major benefits of a payday loan is that they are usually very easy to get and often don’t even require a credit check.  These are the basic requirements of most lenders.

• You can prove steady income (pay stubs, social security checks…)
• You receive at least $800 per month (varies depending on state and lender)
• You are at least 18 years old and a citizen
• You have an active banking account which permits direct deposits

You can apply for a payday loan in a store but online lending has become more popular in the past few years.  Because of the competition between internet-based payday lenders, they usually offer better rates and lower fees. To apply for the payday loan, you will be expected to confirm your ID and will need to provide your banking information.  This is usually done via fax and you will also have to give a valid telephone number where you can be reached. Never pay for any fees on a payday loan up front, including ID check fees.

How You Receive the Money

With storefront payday loans, you will need to write a post-dated check for the amount of the loan and fees.  Once you provide this check, you will be given a cashable check for the loan amount (in some cases, cash is given).  With online payday loans, you will have to provide your banking information during the application process.  The loan amount will be transferred directly into your banking account.  This is the same banking account where the lender will withdraw funds at the end of the term.

Repaying a Payday Loans

Depending on the lender, you may have only one or several options of repayment methods.  The most common method of repayment is as one bulk sum on the end of the term.  For storefront payday loans, the post-dated check will be cashed then.  For online payday loans, the amount will be withdrawn from the given banking account.

If you are unable to pay the loan back, it can “rollover”, which requires opening an entire new loan on the debt plus paying fees over again.  Some payday lenders will allow you to pay off the fees and part of the debt then you can roll back the remaining debt into a new payday loan.

Getting the Payday Loan

Unless you happen to live very close to a storefront payday lender, getting a payday loan online is generally much easier and more convenient.  With storefront payday loans, you have to drive to the lender, will have to visit multiple locations to compare rates, and go within certain hours of operation.  Online payday loans can be applied for anytime and you can shop around multiple options with just a click of the mouse.

For storefront payday loans, you will have to bring ID and evidence of income (like your paystubs or social security check) to the storefront.  You will also need a check which you will post-date for the total amount of the loan plus costs. If your loan is approved, you will be given the loan in person.  For online payday loans, you will still have to prove your ID and income.  This is usually done by faxing in a copy of your ID and you probably will also have to confirm your phone number. There are some online payday loans which don’t require proof of income for small amounts of money.

When your payday loan is approved online, the amount will be transferred into your banking account.  However, they will still have to have an active bank account which can accept direct deposits.  Another downside is that it could take several days before the money reaches your account with an online payday loan. When the loan period is up, the lender will automatically withdraw the money from this account.  No post-dated check is needed so this is much more convenient for people without checking accounts.

Finding the Best Deals

Online payday loans are almost always better deals than storefront loans.  The main reason for this is because of competition.  If you are getting a storefront loan, you will probably just go to the lender which is closest to you because it wastes a lot of time and transportation money to visit multiple locations and compare options.  So, the storefront lenders don’t really have much competition and can get away with charging very high fees.  By contrast, it is incredibly easy to compare payday loans online.  You can also read reviews about the lender and get information about their fees laid out in an easy-to-understand manner.  Because of all this competition, the costs of payday loans online are much lower than with storefronts.  Further, there is much less overhead cost for running an online payday loan store than a brick-and-mortar storefront so the costs can stay lower.

Pros and Cons of Online Payday Loans over Storefront Loans

+Much better deals available online

+Easy to compare payday loans

+Can apply 24/7 and get quick response

+Don’t have to drive to the storefront, saves time and money

+Good option for those without checking account

-May take 3-5 business days before the loan reaches your account

-Customer service may be poor or nonexistent with online payday loans