What Are
Payday Loans?
By
Jason Hahn
Payday loans are
also called cash advances, and are relatively small (usually not
for amounts exceeding $1,500), short-term loans that do not
require credit checks. They are available to borrowers who are a
little short on cash and are looking to bridge the gap between
pay days. They are especially attractive to people who have
immediate cash needs due to certain emergency situations, such
as a car repair or necessary medication.
Cash is given to
the borrower, who gives the lender a post-dated check for the
loan principal plus a loan fee, along with any accrued interest.
The maturity date on the loan will typically be the borrower’s
next pay day, which is when the lender will process the check.
Payday loan
lenders are normally found in small shops or franchises, but can
also be found at large financial institutions who will offer
variations of payday loans.
If a borrower
takes out a payday loan for $100, they will write a post-dated
personal check for $115, which includes the principal balance
and the loan fee. The borrower will receive $100 in cash. The
lender will hold this check for up to two weeks, at which time
the borrower will be given the option to either redeem the
initial check for $115 in cash or to roll-over or refinance the
check by paying a fee that will extend the loan for another two
weeks. If the borrower does not roll-over the loan, the lender
will deposit the $115 check. If the borrower refinances the loan
three more times, they will have to pay an additional $15 for
each roll-over, or in other words, they will be paying $60 to
borrow $100.
Payday loans are
a sore subject for some, and have become a source of
controversy. Critics say that these loans are targeted at people
who do not understand the concept of the time value of money,
and say that payday lenders are no different to loan sharks
since the interest rates are excessively high. In most cases,
the APR on these loans will exceed 250%. In the example above,
the $15 fee is equivalent to a 391% APR.
Though payday
loans are a convenient source of immediate cash for short-term
needs, it goes without saying that potential borrowers should
beware of making continuous roll-overs, and that the APRs they
pay may be quite a bit higher than APRs they might be able to
find on a common credit card.
http://www.paydayperks.com
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