Payday Loans in Iowa: Are They Legal and How Do They Work?

When you need money for an emergency expense or just to cover the bills until your next check, you might consider a payday loan. While payday loans can offer fast cash, they can also be a risky way to borrow. Iowa residents who take out payday loans may want to explore safer alternatives. 

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Are payday loans legal in Iowa?

Payday loans are legal in Iowa; payday lenders are regulated under Chapter 533D of the statutory code. Here's how the law applies to payday lending in Iowa.

• APR: The maximum effective APR is 782%. 

• Fees: A $15 finance charge applies to the first $100 borrowed; for each $100 above that, a $10 fee applies. 

• Loan limits: The maximum loan is $500.

• Loan terms: State law doesn't specify a minimum loan term; the maximum is 31 days.

• Renewal: Rollovers of payday loans are not allowed. 

• Additional loans: Borrowers are limited to two loans per lender at the same time. 

The effective APR used as an example reflects Iowa's statutory $15 finance charge limit that applies to the first $100 borrowed. This APR assumes you get a $100 loan with a seven-day term. In terms of what a payday loan costs, the Federal Trade Commission (FTC) puts the typical APR at 391%. That's based on a $500 loan with a $15 fee per $100 borrowed, and a two-week term. 

How payday loans work in Iowa 

Iowa residents can apply for payday loans online or in-person. When applying for an online payday loan in Iowa, you'll need to provide some key pieces of information, including:

• Proof of identity

• Proof of income (e.g. paystubs, deposit slips, bank statements, etc.)

• Bank account information, including your routing number and account number

If approved, you'll sign a loan agreement and give the lender permission to deposit the funds to your bank account. You also give them permission to draft the amount due for repayment from your account at a future date. 

A typical payday loan term is 14 to 30 days; the maximum loan term in Iowa is 31 days. Some states permit you to roll a payday loan over and delay repayment. In exchange for letting you do that, your lender can charge a fee. Iowa doesn't allow rollovers or renewals of payday loans. 

The risks and dangers of payday loans

Payday loans can solve financial problems in the short-term, but they can create bigger ones. Before you get a payday loan in Iowa or anywhere else, it helps to understand the dangers.

• Debt trap: Payday loans can lead to a cycle of debt if you continually roll them over. Not only do you hand over more money in fees to the lender, but you never make a dent in the original balance. Likewise, paying off payday loans and taking out new ones repeatedly can keep you trapped in debt repayment mode. 

• Rates: Any time you borrow money, you have to consider the interest rate and fees. Compared to more traditional loan options, payday loans are some of the most expensive ways to unlock funds. 

• Bank fees: When you get a payday loan, you agree to let the lender pull funds from your bank account to repay it. That can be a problem if you don't have enough cash in your account to cover the payment when it comes due. If your account balance ends up in the negative because of it, your bank could charge you overdraft fees. The lender could also charge a returned payment or nonsufficient funds fee. 

• Credit scores: A payday loan generally doesn't help you build credit, since these loans are typically not reported to the credit bureaus. A payday loan could hurt your credit, however, if you default on payments. Your lender could report the default to the credit bureaus, which can knock points off your scores. 

Aside from those risks, payday loans aren't really suited to larger financial needs. The maximum loan in Iowa is $500. If you have a serious financial emergency that requires you to borrow, a payday loan could be an expensive band-aid, instead of a cost-effective solution. 

How to avoid the payday loan trap

The best way to avoid falling into a payday loan trap is to have other financial resources to fall back on. That includes building emergency savings and knowing what alternatives you have if you're in a situation where you need to borrow. 

Creating a financial cushion isn't easy, especially if you live paycheck to paycheck. But it's possible if you can trim your expenses down, increase your income, or do a little of both. Here are some tips to help you start building some insulation into your financial plan. 

• Track your spending monthly if you're not doing that already.

• Review each expense and ask yourself if it's necessary. If not, consider getting rid of it or finding ways to reduce it.

• Open a dedicated savings account for your emergency fund and link it to your checking account.

• Schedule an automatic deposit each payday to move money from checking to savings. Even $5 per pay period is a start. 

• Use windfalls, like a work bonus or tax refund, to add to your rainy day savings. 

• Consider how you could increase your income, whether that means getting a part-time job, starting a side hustle or negotiating a raise.

• Talk to a credit counselor if you need help developing a workable budget, or a plan to repay debt. 

Can you do all of this overnight? No, it'll probably take some time to see progress. What matters, however, is consistency. If you can only save $10 each month, that's better than $0. And if you're actively working to lower your expenses and/or raise your income, you should have more money in your budget to commit to saving as time passes. 

When a payday loan might be the only option

Payday loans may be your only way to borrow if you can't qualify for another loan because you have poor credit or no credit at all. You could try selling things you don't need for extra cash, or asking friends and family for a loan, but those could be dead ends. In those situations, you might be forced to consider a payday loan for a short-term cash crunch. 

If you decide to get a payday loan, you can help yourself out by doing your research. That means comparing lenders and loan terms, including the effective APR and fees. You can use a payday loan calculator to estimate your cost to borrow based on different loan amounts, fees and terms.

Choose a loan amount that fits what you need and don't borrow more than that. Make sure that you'll have enough money in your bank account to cover what you'll need to repay when the time comes, and limit yourself to one loan. If you're applying for a payday loan through an app, delete the app once the loan is paid off so you're not tempted to borrow again. 

Safer alternatives to payday loans

Payday loans offer speed, which is great when you have a true financial emergency. However, they're not the safest borrowing option, and there are other ways to get the money you need that are less risky. 

Credit cards

Credit cards let you charge purchases and pay them off over time. Compared to a payday loan, a credit card can offer a higher limit and a lower APR. Some cards let you pay 0% interest for an introductory period, which may last six to 24 months. 

A credit card can become expensive if you have a higher APR and you carry a balance month to month. But you don't have the pressure to pay the balance in full by your next payday and choosing a card with no annual fee won't add to your borrowing costs. 

Earned wage access

Earned wage access programs let workers get part or all of their earned wages before payday. Employers can partner with earned wage access providers to offer this benefit to their employees. You may pay a fee to use these services, but the cost may be far less than a payday loan. 

The most important thing is to consider how taking an advance affects your future paychecks. If you're on a strict budget that assigns every dollar of your pay, getting a smaller check could mean having to juggle the bills temporarily until you're back on track. 

Personal loans (banks or credit unions)

Banks and credit unions offer personal loans, which are loans you can use for virtually any reason. Compared to payday loans, personal loans can offer higher limits and low, fixed interest rates. For example, you might be able to borrow anywhere from $5,000 to $100,000 depending on the lender.

You pay the loan back over time and many lenders let you choose your preferred loan term. Personal loans offer predictability, since you can easily calculate your monthly payment and cost if you know the loan term, amount and interest rate. You'll generally need good credit to get the best personal loan rates. 

Payday alternative loans (PALs)

Some credit unions offer payday alternative loans, which are small loans that have shorter repayment terms than a standard personal loan. You might be able to borrow anywhere from $200 to $1,000 and pay it back over one to six months. 

Credit unions require you to join to apply for a loan, but that isn't a huge obstacle. Many online credit unions now extend membership to a broad range of people. You'll typically just need to open a credit union savings account with a $5 minimum deposit to join.

Credit builder loans

Credit builder loans are designed for people who want to build credit so they can leverage a higher score to qualify for other loans. These types of loans let you borrow money, but instead of getting it up front, it goes into a secure account. 

You repay the loan and your monthly payments are reported to the credit bureaus. At the end of the term, the loan proceeds are released to you. You can walk away with cash in hand, a fully repaid debt and a better credit score than when you started if you always paid on time. 

State-specific assistance programs

Iowa assistance programs can offer cash and other benefits to help you manage basic needs in a financial hardship. For example, you can get help with housing and utilities, food and healthcare through government-sponsored aid programs. Unemployment benefits can help you pay the bills if you lose your job; if you have kids you could get childcare help so you can look for another position. 

Your local department of health and human services or social services can walk you through the types of aid that are available, and how to apply. Keep in mind that many government aid programs typically base your eligibility on your income, household size and assets. 

Borrowing from family and friends

Having a tight circle of friends and family could come in handy if you need a loan. You may know people who are willing to lend you some cash interest and fee-free. 

Getting a loan from friends and family has its risks, however. If you fail to pay the loan back, the relationship could go south. Putting the loan terms in writing or offering something you own as collateral could reassure the person who's lending you the money that you're committed to repaying it. 

Side hustles

Side hustles can help you bring in more money without having to apply for a loan or credit card. Some side hustles even offer same-day pay, so you can work and walk away with cash. 

Popular side hustles include:

• Food delivery

• Grocery shopping and delivery

• Doing yardwork/landscaping

• Odd jobs

• Freelancing online

• Flipping items for resale online

• Childcare

• Pet-sitting or house-sitting

Think about how much time you have and any special skills or knowledge you might leverage for a side hustle. You might need to try multiple side gigs before you find one that's right for you. 

Conclusion

Payday loans are just one way to borrow and it's helpful to explore all the possibilities for getting cash when you need it, with or without a loan. For example, MoneyLion Instacash allows you to tap up to $500 of your pay when you need it, with no interest, credit checks or mandatory fees. You can get your money in 1 to 5 business days, or instantly for a fee. It's a safe and simple way to access funds without borrowing. 

Once you've gotten through the short-term crisis, think about how you can strengthen your financial plan. Creating a budget and devoting part of your paychecks to savings regularly, for example, can help you avoid a situation where you might need a payday loan in the future.

FAQs

What is the maximum loan amount I can borrow in Iowa?

The maximum payday loan amount allowed by Iowa state law is $500. You can have a maximum of two loans with the same lender at one time. 

What fees and interest rates can payday lenders charge in Iowa?

Payday lenders in Iowa can charge an initial finance charge of $15 for the first $100 borrowed. For each $100 above that amount, the maximum fee is $10. 

How long do payday loans last?

Payday loans typically last from seven to 30 days. In Iowa, the maximum loan term is 31 days; there is no minimum loan term specified by state law. 

Will a payday loan affect my credit score?

A payday loan could affect your credit score if you default on payment. When you default on a debt, your creditor can send the account to collections and report it to the credit bureaus. If a defaulted payday loan account shows up on your credit reports, that can harm your credit scores. 

Can I get a payday loan with bad credit?

You can get a payday loan with bad credit. Many payday lenders extend loans to anyone, regardless of their credit profile, as long as they have proof of income, a bank account and a valid ID. However, it may be worth looking into personal loans for bad credit instead, which may offer more favorable rates than payday loans. 

What should I do if I can’t repay my payday loan on time?

If you can't repay your payday loan on time, reach out to your lender to discuss your options. In Iowa, you can't renew or roll over your loan but your lender may be able to offer a different solution. If not, you might ask friends and family for a small loan to cover the amount that's set to be drafted by the lender. That just shifts your debt from one place to another, but it may be easier and less stressful to repay someone you know than a payday lender. 

Sources

• Federal Trade Commission - What To Know About Payday and Car Title Loans

• MyCreditUnion.gov - Payday Loan Alternatives

• CFPB - Can taking out a payday loan help rebuild my credit or improve my credit score?