What is a payday loan?
A payday loan is a type of short term loan in which a lender will extend high interest credit based on the borrower’s income and credit profile. The principal of a payday loan is usually a part of a borrower’s next paycheck. These loans charge high interest rates for immediate short term credit. These loans are also called cash advance loans or check advance loans.
How Payday Loans Work
Payday loans charge borrowers high interest rates. These loans can be considered as foreclosure loans as they are known for their extremely high interest and hidden provisions which make borrowers pay extra cost.
Key points to remember
- Payday loans often involve high interest rates for short term loans.
- Payday loans are usually a part of the borrower’s salary.
- A number of laws have been put in place over the years to regulate high fees and interest rates.
Get a payday loan
Payday loan providers are generally small credit traders with physical locations that allow for credit applications and on-site approval. Some payday loan services may also be available from online lenders.
To fill out a payday loan application, the borrower must provide his employer’s pay stubs indicating his current income levels. Payday lenders often base their loan principal on a percentage of the borrower’s expected short-term income. Many also use a borrower’s salary as collateral. Other factors influencing the terms of the loan include the credit rating and credit history of the borrower, which is obtained from strong credit mobilization at the time of application.
Payday loan interest
Payday lenders charge borrowers extremely high interest rates of up to 500% as an annual percentage of return (APR). Most states have usury laws that limit interest charges to less than about 35%; however, payday lenders have exemptions that take into account their high interest. Since these loans are eligible for many credit cracks in the state, borrowers should beware. The regulation of these loans is governed by the different states, some states even prohibiting payday loans of any kind.
In California, for example, a payday lender can charge a 459% APR over 14 days for a loan of $ 100. The finance charges on these loans are also an important factor for the borrowers as the fees can go up to around $ 18 per $ 100 loan.
Although the Federal Truth in Loans Act requires payday lenders to disclose their finance charges, many borrowers overlook the costs. Most loans are for 30 days or less and help borrowers meet their short-term obligations. The loan amounts on these loans are generally from $ 100 to $ 1,500.
Usually, these loans can be rolled over for additional finance charges, and many borrowers end up repeating themselves. A number of lawsuits have been brought against these lenders, as loan laws were enacted after the 2008 financial crisis to create a more transparent and fair loan market for consumers.