How Do Credit Checks Work for a Payday Loan in 2023?

Credit checks have always been a central part of the loan application process. A traditional bank or financial institution looks at the borrower’s credit history to mitigate the risk of approving an unsecured loan like a payday loan.

However, there has been a rise in nontraditional lenders operating online. Most process and approve payday loan requests quickly without pulling a hard enquiry credit check. They perform a soft credit check which doesn’t require your direct permission, is not visible to other lenders, and won’t impact your credit score.

How do credit checks work? A credit check involves pulling financial information from a credit bureau by a lender, bank, or service provider to learn your financial history. It grants potential lenders access to information about your current and past credit history, any types of loans, and information about your payment habits. That information helps them assess your level of risk as a borrower.

What is a Payday Loan and How Does It Work?

Payday loans, also known as check advances, cash advances, deferred deposit, or post-dated check loans, are small-dollar loans that help sort small unforeseen situations. Typically, you use this short-term loan to sort emergencies like car repair, fix a broken home appliance, pay another overdue loan, pay a ticket to a holiday destination, etc.

Payday loans derive their name from the fact that the funds are borrowed on account-withdrawal authorisation or a post-dated check effective on the borrower’s upcoming payday.

Payday loans are quick and easy to access. To get a payday loan, you only need to meet a few requirements. Most online lenders partner with online lending networks to bring new loan applicants. 

All you need to do is to identify an excellent online lending network or partners like AdvanceSOS. You will then submit a form for a payday loan with AdvanceSOS and wait for approval, which often happens the same day or in one business day.

Most online lenders don’t run a credit check to approve a payday loan. Anyone, even those with a poor credit rating, can usually get approved for payday loans.

Basic Requirements for Payday Loans

Payday loans are designed to be quick and easy to qualify for because they are for sorting emergencies. Here are the basic requirements to be eligible for payday loans according to AdvanceSOS:

  • Be a U.S. citizen
  • Provide valid identification documents (like a government-issued driver’s license or ID)
  • Be of legal age (18 years and above)
  • Have a live checking account to receive funds
  • Proof of steady income of at least $800 per month 
  • Ability to make repayments
  • Bad credit may be considered

After submitting the required documentation, the loan can potentially get approved within minutes or on the same day. If you applied a bit late or your documents need further checks, it may take up to one business day.

How Much Can I Borrow with a Payday Loan?

Payday loan laws and regulations differ with states. This limits the amount of cash you can get and the costs you incur.

Most payday loans range from $50 to $1000. According to CFPB, the average payday loan is $350 on a two-week term.

Payday loans are prohibited in some states. Currently, only around 32 states permit payday lending with different caps on fees, the costs of the loans, and the maximum loan amount a borrower can get.

Most states have a cap on the maximum loan amount you can get to protect the lenders from unscrupulous lenders. However, some states such as Utah, Wisconsin, and Wyoming don’t have a cap. 

Illinois, Idaho, and Delaware have the highest cap amount of $1000. Montana and California have the lowest cap at $300. States such as New Mexico and Nevada limit each payday loan to 25% of the borrower’s monthly income.

With AdvanceSOS, you can borrow any amount from $100 to $35,000 depending on your income, affordability, and credit score. That includes payday loans, bad credit loans, installment loans, and more. Depending on the loan size, you can repay the amount in between 1 to 60 months.

What are the Costs of a Payday Loan?

Payday loans are some of the most expensive types of loans. The cost of payday loans depends on the state you’re getting it from.

Most states have the cost of the loan capped to a certain percentage. Most payday loan fees range from $10 to $30 for every $100 borrowed.The finance charge is primarily based on the loan amount.

Additionally, payday loans also come with very steep APRs. According to the Consumer Federation of America, payday loan APRs can go up to 400% or more. When taking out a loan, you must enter into a legal contract with your lender, and they must disclose the APR before you sign the loan agreement.

How Do I Repay a Payday Loan?

Once you get approved for a payday loan, you may receive a check, cash, or money deposited into your bank account. You will then be required to repay the loan in full, plus the costs of the loan, by its due date, typically within 14 days or by your next paycheck.

Depending on your lender, here are a few options to use to pay off your debt:

A Postdated Check When You Apply

When applying for the loan, you may write a postdated check for the loan amount you’re borrowing plus the lending fees. Your lender holds onto that check for a predetermined due date. When the loan becomes due, you then allow the lender to cash the post-dated check.A Check on Your Next Payday

Typically, payday loans should be repaid by your next payday. When the loan is due, you can write the lender a check. 

The lender may, however, extend this time period by a few days or weeks. Since different lenders have different repayment terms, confirm the specific due date in the agreement or ask them directly.

Online Through the Lender’s Website

You can also submit your bank details on the lender’s online website for them to cut their dues from your bank when the payments become dueA Direct Debit from Your Bank Account

You can arrange with your bank to allow the lender to transfer money from your account on an agreed-upon date.

Rolling Over

According to CFPB, 20% of payday loan lenders default on their loans, and 80% roll them over. It’s vital to confirm whether your lender and state regulations permit rolling over payday loans before taking the loan. Most states don’t allow rolling over, but some do Alabama accepts roll-over once, and Alaska allows it twice.  

If you default on the loan, the lender can electronically withdraw cash from your account.

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    How Do Credit Checks Work for a Payday Loan?