What is a payday loan?

Answer 1

Many check cashing businesses offer small sum, short-term, high-rate, unsecured personal loans. These go by many names, including: payday loan cash advance loan post-dated check loans deferred deposit In a payday loan transaction, the borrower will provide to the lender items such as a paycheck stub, photo identification and a recent bank statement. The borrower writes a check to the lender for the amount and the lender's fee. Under law in some states, the lender's fee is limited. The lender agrees to hold the check until the customer's next payday, up to 30 days. At that time, the borrower may redeem the check with cash, allow the lender to deposit the check or roll over the loan by paying another fee. Payday lenders advertise their services as a way to cover unexpected expenses like car repairs and avoid bounced check fees and late payment penalties. Potential payday loan customers should be aware of the risks and responsibilities involved with this sort of lending. Let's say you want to borrow $200 until you get your next paycheck in two weeks. You write a postdated check to a payday lender for $230 (15% of $200 = $30 lender's fee + $200 loan amount = $230) and get $200 cash in return. The $30 interest you pay on the loan calculates to an Annual Percentage Rate (APR) of 391%. The payday lender may also charge you a one-time fee of $10 to set up an account. If you are unable to repay the loan after the agreed-upon 14 days have elapsed, you may elect to extend the loan for another two weeks by paying an additional $30. If you choose to roll over the loan, you will have paid $60 in lender's fees for a one-month loan of $200. It's easy to see how these fees can quickly add up