Payday loans, also called cash advance loans are small, short-term loans issued so that the borrower might meet their monetary commitments until their next paycheck comes. Also known as cash advance or rapid cash loans, payday loans are offered by specialty loan companies and tend to carry interest rates that are considerably higher than those made available from banks and other more traditional lenders.
As opposed to conventional consumer loans, which may be for thousands of dollars and are meant to be paid back over a period of years, payday loans are offered for fairly small amounts of money ($100-$1500, according to state laws) and are normally intended to be paid back within fourteen days. The loans are generally supplied with a minimum of paperwork; many lenders just require that the customer be employed and that he or she have a checking account.
When the loan is taken out, the borrower shows proof of both employment and a bank checking account, and writes a postdated check for the principal of the loan along with the added interest. In two weeks' time, the consumer is expected to repay the borrowed funds, with interest. If the customer does not appear to repay the loan, the financial institution cashes the check.
If the customer can't repay the loan, most states enable the borrower to "roll over" the loan; that is, to continue the loan for another fourteen days. At the end of the second two week period of time, the customer then owes the principal and four weeks' interest. A few states do not allow rolling over of quick cash loans; others place a cap on how many occasions a loan may be rolled over.
Payday loan lenders generally come under criticism because of the interest rates that they apply to their loans, which may often add up to several hundred percent if considered an annual rate of interest. A typical loan of $100 may well carry a fee of $15 over a two week period. When viewed as an annual rate of interest, this comes down to almost four hundred percent a year. Lenders back up these rates, saying that there is a high default rate that must be paid by other customers. They also point out that the lower rates offered by banks could not be successful over such short lending instances.
Several states have strict usury laws; cash advance lenders in those states frequently circumvent them by giving the loans through banks in states which allow higher rates of interest. Furthermore, critics of payday loans point out that the stores that provide them are typically clustered in poor communities and that borrowers frequently end up in a "cycle of debt", often taking out a brand new cash advance loan as a way to repay a current one. A few states now restrict this practice and maintain databases of who has outstanding loans at any given time. Debtors who are in the database must repay their current debts before applying for a new loan.
Payday loans do fill a consumer need that banks do not, but individuals should bear in mind that cash advance loans are intended to be temporary answers to short-term problems. Any person who has financial difficulties on an recurring basis should look for other answers to their difficulties.