A payday loan is a small, short-term loan that is intended to cover a borrower’s expenses until his or her next payday. Such loans are often the only option available to consumers with bad credit or who cannot get a bank loan, credit card, or other lower-interest alternatives.
Typically, a borrower seeking a payday loan may write a post-dated personal check for, maybe, $250 to borrow $200 for up to 14 days. The borrower has the option to redeem the check by paying $250 in cash, or extending the loan for another two weeks by renewing the loan. They can then pay off the debt and, if necessary, immediately take an additional loan of $200. If the borrower does not refinance the loan, the lender may deposit the check.
Loans are usually repaid on the date employers deposit borrowers’ pay into their accounts. Once the loan is repaid, borrowers can apply for another cash loan until the next payday.
With loans from $200 to $2,500 available, there is huge flexibility, and $500 is the most frequently offered amount, usually on a two-week term. With lender rates varying according to the marketplace and with some lenders offering a payment plan option, where loan re-payments are extended, it pays to shop around.
There is almost immediate cash availability so cash loans are convenient, offering either cash payments or are electronic deposits directly into borrowers’ bank accounts. As lenders do not undertake credit checks, even with bad credit payday loans are still available to everyone as loan approval is based on employment status.
Cash advance loans provide a service that is not available from other sources and processing costs for payday loans do not differ much from other loans, including home mortgages. For example, a $100 one-week loan, at a 20 percent APR (compounded weekly) would generate only 38 cents interest, failing to match loan processing costs. Conventional interest rates for lower dollar amounts and shorter terms would not be profitable. Credit unions have unsuccessfully attempted to offer similar products, but most of these programs have failed due to the high default rates of borrowers.