Understanding What A Payday Loan is? Car Loan Legal Expense Cover
Understanding Payday Loans

What is A Payday Loan?

A payday loan is a type of loan that is given for a short period of time. In most cases, it will not be more than $1500, and it is used to help consumers that need money between their pay periods. A payday loan will typically be given to the borrower in the form of cash, and will be secured by a check that is post dated. The post dated check will have information that displays the interest and principle. The due date for the loan is the next payday of the borrower. Once this day arrives, the lender will run the check through the checking account of the borrower to retrieve the funds. However, this may not be done if the borrower agrees to pay the money back in person.

Since most people receive their pay checks through direct deposit, most payday loan services will electronically remove the money from their accounts. If the customer does not have the money available in their accounts, they will automatically become overdrawn, and they may incur fees from both the bank and the payday loan service. The vast majority of payday loan companies work out of small stores, but large companies have begin profiting from this industry as well. Like the payday loan industry, most banks will take the money back out of their customer's accounts electronically along with interest. The typical interest rate for payday loans or cash advances is about 10 to 20%.

Because of the high interest rates that are often associated with payday loan companies, many states within the US have passed usury laws which regulate them. These laws are designed to insure that payday loan companies keep their interest rates within the APR. The interest rates associated with payday loans are extremely high. For example, a person who borrows $100 through a payday loan company between paydays may have to pay a $16 finance charge, which is the equivalent of over 390 percent APR. This technique may be called a roll over, but many states have banned this practice.

There is a lot of criticism that has been directed at the payday loan industry. Many people have compared these companies to loan sharks or predatory lenders. It should be noted that a large portion of the people who use the services are those that have low incomes. In most cases, they will be young and inexperienced, and may not understand the rules which govern these companies. The interest rates that are charged for payday loans are substantially higher than those that are charged on credit cards.

For example, while the highest interest rate paid on credit cards is 25%, payday loans could be higher than 50%. Another problem that is frequently seen with these loans is called the "debt cycle." Basically, the borrower must continue borrowing money from the company because as soon as they get their check, the money is automatically taken out along with the interest. This will put them in a position where they will often have to borrow more money.