What Are Payday Loans?
Sometimes referred to as payday advances, cash advances, or paycheck advances, payday loans are short term loans that are usually issued for a fairly small amount of money. These loans are meant to help the borrower cover his or her expenses until the time a paycheck is received.
Because of the recent financial reform, this form of lending has come under a bit of review lately. Unfortunately, there are many unscrupulous lenders that take advantage of needy borrowers in times of hardship. It is because of this issue that many states have now set forth stringent usury limits on interest rates and fees that can be charged to consumers. Legislation governing payday loans is solely at the discretion of the individual states and varies a great deal. While some states set strict guidelines, others have banned the practice of payday loans entirely.
Since payday loans are issued for a short period of time, it is not uncommon that there is a substantial difference in the annual percentage rate (APR), and the effective annual rate (EAR). The main reason for this difference is due to the fact that the EAR interest compounds, resulting a repayment of considerably more money.
Payday loans are generally obtained at retail outlet locations. The funds are issued almost immediately without the need for extensive credit or background screenings. The terms of the loan typically state the borrower must repay the loan in full once he or she has received the next paycheck; usually no more than two weeks from the date the loan is issued. Payday loans come with somewhat high finance charges, which can range from fifteen to upwards of thirty percent of the loan amount for the two week loan period. When this is calculated out, the APR can be anywhere from 390 to 780 percent.
The terms of a payday loan are set forth when the borrower writes a check that is postdated for the entire amount of the loan along with all of the associated fees. When the loan comes due, the borrower is supposed to return to the retail location in person to repay the loan. In the event that the borrower fails to return to the store, the lender will cash in the postdated check. If the borrower does not return to repay the loan, and the postdated check bounces, the borrower will have to pay extra fees and interest to the lender, as well as insufficient fund fees to their bank. These additional fees are added to the amount originally owed.
In an effort to lessen their overall risk, payday lenders typically require the borrower to provide proof of steady income. This proof is usually presented in the form of multiple pay stubs; however bank statements may also be necessary.
On top of traditional retail locations, the internet is now rapidly becoming one of the fastest and easiest places to acquire a payday loan. When applying online, the borrower simply completes an application, provides basic personal and employment information, as well as bank account information. Copies of pay stubs, bank statements, and a signed agreement must then be faxed to the lender. Once this has been done, the amount of the loan is directly deposited into the borrower’s bank account, and the loan amount plus applicable fees and interest is automatically withdrawn once the loan period has expired or the borrower’s next payday has occurred.
Payday loans can be a very effective short term funding option for anyone in need of some fast cash. It is important to always properly research potential lenders and their terms in order to protect yourself from fraudulent activity.