What is a Payday Loan?

Most of us have seen and heard the terms Payday Loan and Cash Advance Loan many times. Most large cities have dozens of quick cash stores where you can instantly get a cash advance payday loan, and the online competition from payday loan lenders is fierce. But what exactly is a payday loan?

A Payday loan or cash advance loan, sometimes called an unsecured personal loan, is a loan of $300, $500, $1000 and sometimes $1500 or even $2000, given to someone who can demonstrate regular income. It is usually for emergencies or tight personal finance situations, in which the borrower is unable to make ends meet and cant find a loan from other sources. Most payday loan companies simply charge a flat rate, often around $10- $15 for every $100 borrowed. If the loan is not paid back in full by the due date, hefty late fees and interest fees are usually added. How Do Payday Loans Work?

In a cash advance local store, the clerk generally verifies the information immediately, via computer, and is able to give you the cash within minutes. With online cash advance payday loan companies, they have you fill out an online application. Sometimes faxing is required to show proof of regular income, drivers license, etc. A growing number of payday loan online companies require no faxing. Most payday loan companies have no credit check, because it is assumed if the borrower had good credit, they would be able to get a less costly loan from their bank, credit card company or other sources. Some companies have instant approval, others take up to a few hours for verification. Some offer instant transfer into the borrowers bank account, and others require about 24 hours. The borrower is expected to pay back the loan in full within two-four weeks. Sometimes this occurs automatically the day after their paycheck is deposited into their account, through direct withdrawal. Other times, the borrower must make the payment manually.

Why are some people and organizations critical of payday loans? Critics of payday loan lenders claim that payday loans are targeted to lower income, minority and military families who are having difficulty getting by. When compared with other types of loans, unsecured bad credit cash advance payday loans have a very high APR. For example, a $1000 loan at $15 per hundred dollars borrowed would cost $150. This would be 15% interest if the loan were one year (15% APR). However, if the loan is expected to be fully repaid within a month, the payday loan fees translate to over 150% APR. Many groups and state and federal government organizations are concerned that this takes advantage of those who already have the most financial difficulty. In their defense, payday loan companies argue that they provide a very different service than typical loans and that it is unfair to view them with the same measures. Cash advance pay check companies offer people in desperate need of money to pay bills, handle emergency medical costs, and so forth, a way to get funds when no one else will provide them. The fees are not interest rates, but more like convenience fees, for being able to get a considerable amount of money very quickly, even with a bad credit history.

Several states have recently enacted payday loan laws which seek to protect low income borrowers from getting trapped in a cycle which is all too common: needing to take out payday loans continuously, to pay off the previous payday loans and make ends meet for the current month. Continued use of payday loans can lead to a disastrous downward spiral in which a large percentage of every paycheck is going towards payday loan fees, past and present.

In short, payday loans can be a viable short term solution- when used very sparingly, with a definite plan to repay the loan in full on time. They can also be a sugar-coated poison, that slowly (or quickly) pulls the borrower into a mess much more difficult to dig out of than their original situation. If you are considering getting a payday loan, first make sure there are not other sources, even friends or relatives, which could let you take out a loan and pay it back over a longer stretch of time. Second, make absolutely certain you will be able to repay the loan on time, to avoid significant late fees. And third, actively engage in budgeting and realistic financial planning, so that you can work towards a time, hopefully in a matter of a few months, in which you wont need to take out such a costly loan in order to take care of all monthly financial obligations.