Payday loans are also called cash advances. They are short-term loans for small amounts (usually no more than $1,500) that do not check your credit. They can be taken out by people who need a little extra cash to get them through until their next paycheck. They are especially appealing to people who need cash right away because of an emergency, like a car repair or a medicine they need.
The lender gives the borrower cash, and the borrower gives the lender a post-dated check for the loan principal, a loan fee, and any interest that has built up. Most of the time, the loan will end on the next pay day of the borrower, when the lender will cash the check.
Payday loan lenders usually work out of small shops or franchises, but you can also find them in large banks that offer different kinds of payday loans.
If a person takes out a $100 payday loan, they will write a personal check with a future date for $115, which is the amount of the loan plus the fee. The person who borrowed money will get $100 in cash. This check will be held by the lender for up to two weeks. After that, the borrower will have the choice to either cash in the first check for $115 or roll it over by paying a fee to extend the loan for another two weeks. If the borrower doesn't roll over the loan, the lender will deposit the $115 check. If the borrower rolls over the loan three more times, they will have to pay an extra $15 each time. This means that to borrow $100, they will have to pay $60.
Some people feel bad about payday loans, and they have become a source of debate. Critics say that these loans are for people who don't understand how money changes over time. They also say that payday lenders are the same as loan sharks because they charge too much interest. Most of the time, the APR on these loans will be higher than 250%. In the example given above, the $15 fee is the same as an APR of 391%.
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.
