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Payday Loans 101

 

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Author: Emily Ferreira

Payday loans are a good option for people in need of money before payday especially in the case of emergencies such as medical expenses, car repairs, or important one-time payments. Payday loans, also called cash advance loans, post-dated check loans, payroll advance loans, and deferred deposit check loans, are short-term loans with very high interest rates. Borrowers are required to provide payday lenders with a post-dated check which is used to pay off the loan and interest expense at the end of the loan period. If the borrower is unable to pay off the loan by the end of its term, additional fees are added to the loan. Although these loans are an easy and convenient way to access money in times of need, borrowers shouldn’t use them for unnecessary expenses. Different lenders charge different fees depending on the loan amount and often provide discounts to repeat customers. Borrowers should explore other methods of financing their expenses to avoid getting caught into the payday loan cycle, sometimes resulting in credit debt.


Payday loans are quite popular with people who do not have a savings account or credit card. Requirements for approval vary from payday lender to lender but generally borrowers are simply required to have a steady income and a checking account. The application process takes just minutes because applications are only required to provide basic documents such as proof of identity. These loans typically extend up to 30 days and borrowers are usually required to pay off the loan at the time of their next payday. The Truth in Lending Act protects borrowers by requiring payday lenders to reveal all costs associated with the payday loan. These consumer laws, also called “usury” laws, detail specific terms and rates that are permissible in the lending industry. Usury laws vary from one state to another and some states, such as New York, have banned payday loans.

Advantages:

  • Fast and easy way to gain access to money.
  • Useful for people with bad credit because credit checks are not done in the application process.
  • Handy for borrowers with no savings account or credit card.
  • It may be possible for the borrower to get a percentage of the money refunded if the loan is paid off before the end of its term.

Disadvantages:

  • Expensive method of borrowing money. APR on payday loans average around 400% compared to 7% on ordinary loans and 12% on credit cards.
  • Payday loans need to be repaid in a very short period. If the loan is not paid off by its due date, the lender can report the borrower to the Credit Bureau, which can affect the borrower’s credit rating.
 

 
 
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