Writer and editor - Joseph Smith | Updated on 2023-03-05
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How Do Three-Month Payday Loans Work?
Three-month payday loans are the in-between option between payday loans and traditional installment loans. Like payday loans, they don’t usually need a credit check, you can only borrow a small amount, and the interest fees are in the triple digits. However, unlike payday loans, you have three months of equal installments to pay off the amount, rather than a one-month lump sum.
While the idea of having three months to pay off your payday loan sounds great in principle, it’s important to remember the very high interest rate associated with payday loans. Many payday loans have an APR of 400% or higher, which means that over a year, you’ll have to pay 400% of your loan amount back in interest. The only reason this isn’t a problem with payday loans is that you only have to pay 1/12 of that interest due to the length of the loan. With a three-month payday loan, this increases to 3/12 of 400%, which is a significantly higher number.
Three-month payday loans are a balancing act. If you can’t afford to pay back your loan on your next payday, the three-month option gives you a bit more time and means that the monthly repayments are lower and more affordable. However, you will be paying significantly more in the long run, which may result in a debt spiral.
Lenders will each have different requirements based on state regulations. In general, to qualify for a payday loan, you need to:
Be 18 or older
Have an active bank account
Have proof of income
Be a US citizen or permanent resident
Improve Your Credit Score and Improve Your Chances for a Loan
One of the main factors that determine whether or not you can qualify for a loan is your credit score. Your credit score is calculated by one of three credit bureaus: TransUnion, Experian, and Equifax. They take into account various aspects of your credit history, including how well you manage your debt and how reliable you are when paying off loans.
Having a bad credit history can seriously affect your chances of a loan. Many lenders are unwilling to lend money to people with bad credit because they see them as a financial risk. Even if you do qualify for a loan, you’ll find that your interest rate will be much higher than usual to offset the risk of you not paying off the complete loan amount. This higher interest rate can add to your financial burden and make an already expensive loan even more costly to pay off.
Having a good credit score is all about showing that you can manage your finances correctly and are living within your means. Not only do you have to show that you can pay your current bills on time, but also that you can take on extra debt and pay that off as well.
There are many long-term solutions to improving a bad credit score, including:
Consolidating your debt: if you have multiple credit cards with negative balances, work to pay off the smaller ones as soon as possible without closing them. Having all your debt in one credit card lowers your credit utilization score, which can improve your credit score.
Fix mistakes: credit bureaus receive millions of lines of data each day, so mistakes are inevitable. Go over your credit report carefully and dispute any errors that may bring down your credit score.
Use a secured credit card: unlike ordinary credit cards, secured credit cards work by having a positive balance, which you can then spend, instead of borrowing money and then paying it back. They’re a great way to improve your credit score without running the risk of adding extra debt.
The big drawback of many of these methods is that they take months or even years of consistency to make a difference to your current score. Unfortunately, there are very few immediate solutions and you should take the long view when trying to improve your credit history. A useful side effect of working to improve your credit score is that you’ll become better at managing your finances and handling debt as you progress and raise your score.
Pros and Cons of Three-Month Payday Loans
Pros:
Easy access to fast cash: since three-month payday loans don’t require a credit check, they’re often the fastest way to borrow money. Many online payday lenders have streamlined application processes that take less than five minutes to complete, and you’ll get an instant decision within seconds. You can then get your money within a business day.
No credit check: most payday loans don’t do a hard credit check and rely on soft credit checks or no credit checks at all. Hard credit checks can affect your credit score, so avoiding them, if necessary, is a good way to keep a higher rating.
Three months to pay: a longer repayment term means that you have smaller monthly repayments to pay. Lower repayments can make the loan more manageable, especially if you’re not sure your paycheck can cover the cost of a traditional payday loan.
Cons:
They’re very expensive: payday loans have incredibly high interest rates, as well as a variety of fees that many people fail to consider. Compared to similar short-term personal loans, payday loans are significantly more expensive to pay back, which can lead to a debt spiral where you can’t keep up with your repayments, which adds on extra fees that you can’t afford to pay.
They don’t help you build credit: since payday loan companies don’t report to the credit bureau, repaying a three-month payday loan doesn’t influence your credit score.
Do Payday Loans Help Build Credit?
No. Payday loan companies don’t report repayments to the credit bureau, typically because of the short-term nature of the loan. The only time that they do get in contact with the credit bureaus is if you miss a payment and your account is handed over to collections. So while payday loans can’t help you build credit, they can hurt it quite badly.
What Happens if You Can’t Pay on Time?
If you can manage to repay your payday loan on time, you have nothing to worry about in terms of a debt spiral. However, if you miss your payment, you start incurring extra fees, not only from the lender but also from your bank account.
Many payday lenders get access to your bank account and permission to withdraw their payment automatically on the due date. If you miss this payment, you’ll get hit with overdraft and insufficient balance penalties from your bank, in addition to the payday loan fees.
Typical fees you can expect to pay when you miss a payday loan repayment include:
Insufficient funds charge: banks usually charge a penalty when a lender tries to cash a check or withdraw money from an account that doesn’t have enough funds
Rollover fees: these fees trigger when you push back your loan’s due date
Late fees: the lender can also charge you a penalty fee because you didn’t pay your loan back on time
These rollover and late fees get incorporated into your debt, which in turn raises your monthly repayments. If you struggled to make one repayment, chances are you won’t be able to make a higher repayment. Instead, you’ll fail to pay again during the next month and the fees will accumulate, continuing a cycle of debt that is very hard to escape.
Joseph Smith
Writer and editor
Joseph Smith is an experienced freelance writer with over 11 years of experience. His area of expertise includes finance, loans and lending. His work has been featured on various large websites including this one. Read more about us »
