What Are the Basic Requirements to Qualify for a Payday Loan?

Payday loans, also known as cash advances, are short-term, low-balance, high-interest loans typically at usury rates. They are so named because of a tendency for the funds to be borrowed on a postdated check or account withdrawal authorization effective on the borrower’s upcoming payday.

These loans are designed to be quick and generally easy to qualify for if the applicant has a job, a valid form of identification, a checking account, and is age 18 or older. They are intended to help consumers get some quick cash to hold them over until their next paycheck, hence the name “payday loan.” Payday loans are also called cash advance loans, deferred deposit loans, postdated check loans, or check advance loans.

Basic Requirements for Payday Loans

According to the U.S. government’s Consumer Financial Protection Bureau (CFPB), to qualify for a loan, most payday lenders only require that borrowers:

• Be at least 18 years old
• Have an active checking account
• Provide some proof of income as well as valid identification

The loan can be approved in as few as 15 minutes. In most circumstances, the borrower writes a check for the loan amount plus a lending fee, and the lender holds onto the check until a predetermined due date.

Payday loans are intended to last for just a few weeks. When the loan comes due, the borrower either pays off the loan or allows the lender to cash the postdated check or otherwise make a withdrawal from the borrower’s account.

Recent CFPB Rulemaking

The CFPB issued a final rule on July 7, 2020, that removed a requirement of a 2017 Obama administration rule mandating that payday lenders assess a borrower’s ability to repay a loan and left in place an Obama administration requirement that limits repeated attempts by payday lenders to collect from a borrower’s bank account.

Leading up to that July 7 rule, the then-Trump administration issued proposed rules in February 2019 to revoke the mandatory underwriting provision of the 2017 rule and to delay the Aug. 19, 2019, implementation of that rule, followed by a June 6, 2019, final rule delaying the August 2019 compliance date.

The Risk of Payday Loans

Many borrowers run into financial trouble with these kinds of loans when they can’t pay them off as they first come due. Each time the borrower extends the loan, more fees are tacked on. Payday lenders charge a fee of $10 to $30 for every $100 borrowed, according to the CFPB. A $15 fee works out to about 400% annually.

Payday loans are accessible to consumers with poor credit and usually do not require a credit check. About 12 million Americans use payday loans each year, and most of them do not have access to a credit card or savings account, according to the Pew Charitable Trusts.

Payday Loan Interest Rates

Loan requirements should not be the only consideration for people thinking about a payday loan. In terms of annual percentage rates, it is not uncommon for payday loans to exceed 500% or even 1,000%. Even though business models and regulations limit the size and duration of payday loans, these types of loans are still an expensive alternative and should be undertaken with care.

Because of the high interest rates, payday loans are the most expensive way to borrow money. Some states have laws regulating how much payday lenders can lend and how much they can charge for loans, while other states, like New York, ban the practice of payday lending altogether. In those states where the practice is banned, lenders often get around the regulations by partnering with banks in other states.

Members of the military have additional protection from predatory interest rates. Under the Military Lending Act, payday and other consumer loan interest rates are capped at 36%. This interest rate is known as the Military Annual Percentage Rate (MAPR). This rate is independent of other limitations set by individual states.

Payday Loan Amounts

Qualifying loan amounts vary depending on the borrower’s income and the payday lender, although most states have laws establishing maximum payday loan amounts. Some states even limit the ability of borrowers to have multiple outstanding payday loans in an attempt to keep consumers from borrowing large amounts at extremely high interest rates. Loan amounts can vary from $50 to $1,000, depending on state law.

The Bottom Line

Payday loans are available to anyone with a source of income, valid identification, and a checking account. However, these loans can quickly escalate, charging predatory lending rates that sink borrowers deeper in debt. Be wary when considering a payday loan, and make sure that you can repay the loan in a timely manner.