How Payday Loans Work

Unexpected bills and expenses have a way of showing up at the most inopportune times. If you are living from paycheck to paycheck, need money in a hurry, and don•t have any credit cards or savings, a payday loan may seem appealing. Payday loans are short-term loans for small amounts of cash for small amounts of time that typically carry high fees.

No matter what name they go by, payday loans, check advance loans, cash advance loans, post-dated check loans, deferred deposit check loans, or payroll advance loans, the premise is the same. A consumer borrows a small amount of cash from a lender and pays an incredibly high fee for the privilege of borrowing the money for a short time.

What happens when I get a payday loan?

The borrower writes a personal check that is payable to the lender he is using. The check totals the amount the consumer wishes to borrow plus the fee that the lender is charging for the service. The check is post-dated to reflect the date repayment is due, usually about two weeks. Additionally, the consumer signs a loan agreement, which is a legally binding document.

Typically, the only thing needed to get a payday loan is proof of employment, usually a current pay stub, plus a check written for the amount to be cashed on payday or a bank account number for an account from which the funds may be electronically withdrawn to pay the debt.

Check cashing companies, small lenders, and online finance agencies offer payday loans. Using an online lender, however, requires the consumer to give a bank account number to the lender for repayment rather than a check.

Are there any fees?

Most lenders allow the borrower to renew or roll over the loan for the same time frame. However, the fee will be imposed each time the loan is renewed. The fees can add up quickly if the consumer continually renews the loan.

Although the interest rate varies among lenders, typically, a flat fee per a specified amount or a percentage of the total will be charged. Rolling over the loan simply delays the inevitable, and increases the actual cost of the loan.

The Truth in Lending Act requires the lender to disclose the APR or annual cost of the loan, as well as the fee charged. Complaints concerning payday loans can be made to the FTC or Federal Trade Commission.

Several advantages of a payday loan exist.

• The loans are easy to acquire.
• No collateral is necessary.
• No credit history check is required.
• The consumer does not need to have any savings.

Several disadvantages to a payday loan exist.

• The loan is a temporary fix.
• It does not solve long-term debt.
• The fees are excessively high.
• Using payday loans for ready cash can become addictive.

If you are considering a payday loan, remember to shop around and look for the best terms possible, specifically the lowest APR and the smallest fee.