Browsing online lenders to find the right payday loan for you can be tiresome work, especially when you’re in a financial emergency and all you need is a quick financial fix to help you resolve a situation.
However, searching for lenders also exposes you to less honest lenders in the market, who use payday loans for predatory purposes of luring unsuspected customers and taking advantage of them at a time when the customers are probably more vulnerable.
We’re here to discuss what makes payday loans legit, what to look for in a lender, and how you can identify and avoid predatory lenders and save time and even money by doing so.
Ready to get started right away? Just fill in our simple online form, and a legit payday loan might be on your way today!
What Makes a Payday Loan Legit?
Before we dive into the various factors that make a payday loan legitimate, let’s briefly discuss what payday loans actually are and why we should question their legality in the first place.
Payday loans are small-dollar, short-term loans that are granted on a two- or four-week repayment period that don’t typically require a credit history check nor rely on your credit score to determine your eligibility for a loan. They’re small, unsecured loans that you obtain from lenders to cover smaller, unexpected expenses or financial emergencies, and you repay them following the receipt of your next paycheck.
Payday loans are specifically designed for customers who can’t secure a loan from a traditional financial institution due to a poor credit history and bad credit. They usually don’t require any collateral either, which means that the lenders almost always perceive borrowers as high-risk, imposing high interest rates in the form of annual percentage rates (APRs).
These APRs tend to be exorbitantly high and often go as high as 400%. This means that if you borrow $500 with a one-month repayment term in Florida, you’ll end up paying back $664.38 to the lender. That’s precisely why you should be concerned about the legitimacy of the business you’re borrowing from; high APRs and short repayment terms make payday loans perfect for predatory lending.
Fortunately, many states, including Texas and New York, have imposed laws and regulations that regulate these lenders in a legal attempt to limit predatory lending practices. This includes certain criteria a lender has to meet to be considered legal, ethical, and fair for the borrower. Legitimate lenders will adhere to state regulations, which may also include caps on interest, fees, and the number of loans a borrower can take.
Legitimate payday lenders will also provide and clearly disclose any and all terms to the borrower during the loan application process but before the loan agreement is signed by both parties. This includes the loan amount, interest rates, fees, repayment terms, and any penalties.
This extends to fair collection practices. Lenders might ask for direct deposit authorization, which would provide them with the ability to withdraw the repayment from your checking account directly.
Legitimate lenders will resort to fair debt collection practices that are mandated by the Fair Debt Collection Practices Act of 1977, which is a consumer protection amendment that establishes legal protection from abusive debt collection practices, such as unlawful, harassing, or abusive tactics.
How to Choose the Best Legit Payday Loans
Due to their accessibility and less stringent requirements regarding credit checks and credit scores, many people are using online payday loans to borrow a small amount of money to cover their financial needs until their next payday. This online application process is quick, offering instant funding options which are particularly useful in emergencies.
However, these loans aren’t without risk; not all lenders are the same, and the extreme nature of payday loans (high APR and short repayment terms) often sees borrowers trapped in situations where they’re taking out one payday loan to repay the previous one. It’s a vicious cycle of debt that has no end until the debt is passed to collection.
Learning how to identify legit payday lenders will help you and those in need to avoid some of the biggest risks associated with payday loans. Here are some factors that ensure that the loan provided is legitimate and trustworthy:
Transparency
Transparency is the first sign of a trustworthy lender, and it’s the lender’s responsibility to provide you with all the information, including fees, charges, interest rates, and tenure of the payday loan, during the loan application but before the loan agreement is signed.
The loan agreement should be clear and specific about the loan amount, fees, interest, repayment terms, and other details pertaining to the loan, such as possible penalties and whether or not you have the right to refinance the loan in case of default.
History of Good Lending
Checking the lender’s history, online reviews, and standing with the Better Business Bureau (BBB) can reveal plenty about a potential lender. You can check their reviews on Google, Facebook, and other social media platforms to learn about what others have to say about that specific lender.
Upfront Fees
Legitimate payday lenders won’t ask you to cover any additional fees because the initial fee is deducted from the loan amount, with other charges and fees deducted from repayments and installments. If a lender asks for any upfront payment, that’s a business you want to avoid doing business with.
Licensing
You can also check whether or not the lender is licensed by the state in which they operate, as it indicates that the lender has been examined by state or federal regulators and adheres to the approved business practices. You can easily do this by contacting the office of the Attorney General of your state.
Tips for Avoiding Payday Loan Scams
Now that you know what to look for in a legit payday lender, it’s time to discuss all the potential red flags that would indicate that you’re dealing with a less trustworthy lender. Here’s what you need to look out for:
Incentives
Incentives aren’t necessarily a bad thing; many lenders offer incentives such as reduced interest if you pay back before the due date, thus encouraging borrowers to repay as soon as possible. However, some lenders might try to make their loan products more appealing by adding certain incentives to get you to borrow from them, like limited credit checks or guaranteed loan approval.
These aren’t always as great as they sound, so make sure to double-check all the fine print associated with the loan agreement, as it often specifies the less attractive side of those appealing options.
Multiple Loans
Some states have imposed a law that restricts lenders from offering payday loans that exceed certain amounts. Lenders often break up a larger loan into multiple smaller loans to stay under the legal limit and bypass the legal imposition.
Be cautious of lenders who suggest breaking up one loan into several smaller pieces; the practice alone, while not illegal, represents a gray area, and the lender will often collect interest and fees and all the loans.
Tribal Loans
Tribal loans aren’t a red flag on their own, but they can be when they’re offered to non-Native Americans. Some lenders locate their businesses on lands that belong to recognized Native American tribes because those lands are exempt from state and federal regulations.
This allows lenders to offer and provide loans without adhering to consumer protection laws that don’t apply to Native American lands. This means that while you’re also likely to get a loan, you’re also waiving certain rights that have been put in place to protect you as a consumer.
Top Alternatives to Payday Loans
Though they offer plenty of benefits, such as the lack of credit checks and same-day or next-business-day funding, the associated costs of payday advances aren’t something that should be taken lightly, we’re here to offer viable alternatives.
Borrow from a Credit Union
Some traditional financial institutions, such as credit unions, often offer payday loan alternatives that are lower-cost payday loans with reasonable APRs and longer repayment terms of up to 12 months.
Bad Credit Loans
If your credit score is less than ideal, securing a typical installment loan might be difficult, but direct lenders and personal loan providers will often offer loans for bad credit. These come with higher interest rates compared to similar financial products. Just like other financial solutions to your financial situation, loan funds are typically loaded into your bank account within 24 hours of signing the loan agreement.
Cash Advance
Taking out a typical cash advance from your credit card company, despite also being quite pricey, is also a more viable alternative compared to payday loans, mostly due to significantly lower APR ranges. They don’t typically affect your credit score if you have good credit.
Summary
Payday loans are great financial products when provided by a legitimate payday loan lender that’s both licensed and regulated by the state in which they operate. If you’re looking for access to some quick cash to cover expenses or just fill the gap until your next paycheck, don’t hesitate to fill in the form, and let us connect you to your next lender.