A payday loan is a special loan that was created to help people who are temporarily struggling and are in need of a little extra cash fast. This type of loan is commonly referred to as “payday advance.”
This type of financing is considered “hard money” and some call it “predatory lending” because of the extremely HIGH interest rates. They are often a lender of last resort for some people down on their luck.
Payday loans are very small, short term loans that are required to be paid back in full by the borrower by the time they receive their next paycheck. If the borrower is not able to pay the loan amount including the interest fees, the lender will begin deducting money from the borrowers bank account. The lender will give you usually at least two weeks before the payment is due
“Typically, a borrower writes a personal check for $100-$300, plus a fee, payable to the lender. The lender agrees hold onto the check until the borrower’s next payday, usually one week to one month later, only then will the check be deposited. In return, the borrower gets cash immediately. The fees for payday loans are extremely high: up to $17.50 for every $100 borrowed(1) , up to a maximum of $300. The interest rates for such transactions are staggering: 911% for a one-week loan; 456% for a two-week loan, 212% for a one-month loan.
For this quick loan there will be very few requirements, much quicker application process, and usually approved the very same day, unlike any other loans offered. Below is a quick list of the requirements for a payday loan:
- Borrower must be able to provide recent pay stubs and prove they have a steady job/income.
- You must be able to provide proof of where you reside.
- Borrower must be at least eighteen years of age.
- Most important of all, the borrower must have a bank account that is open and valid.
- Since this type of loan is short term and has a very low balance, the loan will always have an extremely high interest rate.
Here’s how they work: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the amount borrowed — less the fee — into the borrower’s checking account electronically. The loan amount is due to be debited the next payday. The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”
The federal Truth in Lending Act treats payday loans like other types of credit: the lenders must disclose the cost of the loan. Payday lenders must give you the finance charge (a dollar amount) and the annual percentage rate (APR — the cost of credit on a yearly basis) in writing before you sign for the loan. The APR is based on several things, including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your loan.
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