What Are Payday Loans?
Payday loans are also called cash advances, and are relatively
small (usually not for amounts exceeding $1,500), short-term
loans that do not require credit checks. They are available to
borrowers who are a little short on cash and are looking to
bridge the gap between pay days. They are especially attractive
to people who have immediate cash needs due to certain emergency
situations, such as a car repair or necessary medication.
Cash is given to the borrower, who gives the lender a post-dated
check for the loan principal plus a loan fee, along with any
accrued interest. The maturity date on the loan will typically
be the borrower's next pay day, which is when the lender will
process the check.
Payday loan lenders are normally found in small shops or
franchises, but can also be found at large financial
institutions who will offer variations of payday loans.
If a borrower takes out a payday loan for $100, they will write
a post-dated personal check for $115, which includes the
principal balance and the loan fee. The borrower will receive
$100 in cash. The lender will hold this check for up to two
weeks, at which time the borrower will be given the option to
either redeem the initial check for $115 in cash or to roll-over
or refinance the check by paying a fee that will extend the loan
for another two weeks. If the borrower does not roll-over the
loan, the lender will deposit the $115 check. If the borrower
refinances the loan three more times, they will have to pay an
additional $15 for each roll-over, or in other words, they will
be paying $60 to borrow $100.
Payday loans are a sore subject for some, and have become a
source of controversy. Critics say that these loans are targeted
at people who do not understand the concept of the time value of
money, and say that payday lenders are no different to loan
sharks since the interest rates are excessively high. In most
cases, the APR on these loans will exceed 250%. In the example
above, the $15 fee is equivalent to a 391% APR.
Though payday loans are a convenient source of immediate cash
for short-term needs, it goes without saying that potential
borrowers should beware of making continuous roll-overs, and
that the APRs they pay may be quite a bit higher than APRs they
might be able to find on a common credit card.
Payday Loans