Payday loans are short-term cash loans based on a borrower's personal check, which is held for future deposit or via electronic access to the borrower's bank account.
Borrowers write a personal check for the amount borrowed, plus the finance charges, and immediately receive cash. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.
Lenders hold the checks for a short period of time – generally 14 days – at which time the loan and the finance charges must be paid in one lump sum. Borrowers can typically repay the loan in cash, allow the original check to be deposited at the bank, or pay only the finance charges and roll the loan over for another pay period.
If the account is short on funds to cover the check, the borrower usually faces a bounced check fee from their bank in addition to the costs of the loan, and the loan typically incurs additional fees and/or an increased interest rate as a result of the failure to pay.
Be Careful, It's Easy to Get Into Trouble
Here's an example of how you can get into trouble with payday loans. Richard was $200 short of having enough money to pay his bills, so he borrowed it from a payday lender who charged him $60 for up to 15 days. His plan was to repay the money when he received his next paycheck in two weeks. Fifteen days later, he still didn't have the $260 he needed to pay off the amount he borrowed plus the $60 fee. So he simply paid an additional $60 fee and rolled his payday loan over for another two weeks. The cycle continued for the next six months. At that time, he had paid $720 in fees and still owed the original $200. Repetitive extension of a payday loan may force you into a cycle of debt that cannot be broken.
Payday loans range in size from $100 to $1,000, depending on state legal maximums. The average loan term is about 14 days. Loans typically cost 400% annual interest (APR) or more. The finance charge ranges from $15 to $30 for ever $100 borrwed. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Payday loans can be extremely expensive compared to other cash loans. A $300 cash advance on the average credit card, repaid in one month, would cost $13.99 finance charge and an annual interest rate of almost 57%. By comparison, a payday loan for the same $300 could cost about $100 at more than 400% annual interest.
Requirements to Get a Payday Loan
All that is generally required to get a payday loan is an open bank account in relatively good standing, a steady source of income, and identification. Lenders do not conduct a full credit check or ask probing questions to determine if a borrower can afford to repay the loan. However, there are states that have put restrictions on the number of outstanding loans you can have at any one time.