Payday loans and how they work
pay day loans and how they work
A borrower can receive a payday loan which is essentially a short term cash loan based off of the amount that is on his/her personal check. This check is given to the lender as a future deposit as insurance against the loan. The check will include the amount of the loan plus the additional finance charges. The lender may also require electronic access to the borrowers account in order to make the necessary withdrawls for the loan repayment on the due date.
Payday loans can be paid in cash, or the borrower can allow the lender to deposit the check hat was used for deposit insurance against the loan. In some cases if the borrower cannot pay the full amount at next payday, then it is possible to roll over the debt until the following week as long as the finance charges are paid.
Terms of payday loans
Depending on legal maximums set by the state, payday loans will average in amounts anywhere from 100.00 to 1,000.00 and are usually set as 2 week terms. The interest charges can range from 10.00-30.00 for a 100.00 loan. So they are quite expensive. This works out to an average of 470% (APR) annual interest rate. Shorter term loans can result in much higher finance charges of approximately 780% APR.
Payday loans costs compared to other types of loans.
Compared to other types of cash loans, payday loans can be rather exorbitant in cost. For example if we took a 300.00 cash advance on a regular credit card that was paid in full at the end of the month one would incur a possible 12.00-13.00 finance charge resulting in a APR of around .55%-57%. Taking a payday loan of the same amount (300.00) would result in finance charges of approx. 17.00 per every 100.00. So we would be looking at 51.00 finance charge for the same 300.00. This amounts to approximately a 426% annual interest rate.
Payday Loan Requirements
In order to qualify for a payday loan, all you need is a bank account in good standing, proper identification and a steady source of income. In most cases a lender will not conduct a full credit check in order to lend you money. It is possible to get a payday loan with bad credit, however you must insure that you have the means to pay it back.
Where to get a payday loan
In the US, there are a number of resources available for those seeking to get a short term cash loan. You an get a payday loan from loan stores, pawnshops, check cashiers and rent to own companies to name a few. Today, there also many online loans companies that create a coveniance for borrowers. The Center for Responsible Lending reported that by the end of 2006 there were over 25,000 payday loan services in the US that lent out a loan volume as much as 29 billion dollars. This is just in loans, the finance charges payed by borrowers totaled over 5 billion. In the following years, industry analysts predict loan volumes to rise by over 50 billion by 2010.
Legal Status for Payday Lending
At this time payday loans are authorized in 37 states by regulations and state laws. The regulations allow for lenders to operate in one additional state from where they are located own. The laws and regulations vary from state to state. Some states allow lenders to opt for a fee structure limiting payday lending, other states have caps on the interest rates allowed per loan. These legislations are intended to reduce loan entrapment due to high finance charges imposed on the borrower, forcing them to continuously borrow, thus creating a never ending cycle of debt.
New Protections in effect for consumers
In October 2007, new federal protections took affect for service members and their families. The department of defence now has regulations in regards to payday loans, tax refund loans, and car titles. Lenders can no longer charge more than 36 % APR including fees, checks, tax refund or car titles to secure loans.
Risks of payday loans
Since most payday loans are secured with future checks held by the lender, it has created a common occurrence of having unpaid checks bouncing from the borrowers bank account. This leads to non-sufficient funds charges and causes negative credit ratings on the borrowers credit reports. A person can lose their bank account or have trouble opening a new bank account if they develop a cycle of bouncing checks in order to secure more payday loans.
Be careful not to fall into a Debt Trap
Due to the extremely high cost of borrowing, payday loans trap consumers, putting them in borrowing cycles that are very difficult to get out of. In many instances the consumer will pay the consequences of not making good on the check used to get the loan. In many cases some conumers will borrow an average of 13-15 payday loans in a year, that works out to more than once a month.
Pay day loans online
With the advent of the internet, online payday lending has become a very popular and ever growing market. The pros is the ease and convenience in which a consumer can find a potential lender. It is easy to apply online a fax over the application, an have the loans direclty deposited into the borrowers bank account and electronically withdrawn by the due date of the loan. The cons are that there is the risk of doing business with a fraudulent entity that can result in the borrowers stolen identity and unlawful debiting of funds.
If you are looking for a payday loan then hopfully you now have a better understanding on how it works, the resources and the risks involved.
Leave a comment