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Payday Loans or Cash Advances.  What are they?

We hear about payday loans or cash advances everywhere.  There are ads on the radio, television, and the Internet.  Storefront lenders are common in many citys around the U.S.  You, or someone you know, has probably had to resort to one of these high-priced loans to take care of urgent expenses until payday.  Make sure you know how these loans work before you take one out! If you don’t understand what you’re getting into, you can run into more financial trouble than you bargained for.  When used properly, these loans can be less expensive than some alternatives, but do your research first.  Read this article, and other articles and tips at loanbits to be prepared. 

The payday or cash advance loan surfaced in the early 1990s and became popular as a result of consumer demand and shifting conditions in the financial services field. The demand for these loans was driven by a number of factors, including:

1. The high cost of bounced checks, overdraft protection fees and late bill paying penalties;
2. The exodus of traditional financial institutions from the costly, small denomination and short-term lending market;
3. The passing of laws in a number of States permitting payday or short term loans; and
4. The founding of the Community Financial Services Association of America (CFSA) to insure improved consumer protection and payday regulations.

How do these loans work? The average amount for a payday loan is between $100 to $500 and is secured by the borrower’s next paycheck (typically a two week term) when payment in full is due. A borrower writes a post-dated check to the lender for the amount of the loan plus interest and fees, or authorizes the lender to debit their account on their next paydate.

On the loan due date, which is the next paycheck date, the borrower is expected to pay off the loan in full. This may be accomplished in person or the lender may remove the funds electronically from the borrower’s checking account. If the account is short on funds to pay the check, the bank can impose a bounced check fee, and the lender may charge additional or higher fees as a result of failure to pay. Finance charges generally range from $15 to $30 per each $100 borrowed. When disclosed as an annual percentage rate, this can range from 390 percent to 780 percent.

Payday lenders, unlike traditional lenders, do little or nothing to insure a borrower is credit worthy, although some may ask for a recent pay stub to prove steady income. Example: You write a personal check for $115 to borrow $100 for 14 days. The lender representative agrees to hold the check until your next payday. When payday rolls around, depending on your plan, the lender either deposits the check or you redeem the check by paying $115 cash.

Another option would be to pay a fee and extend the loan for another two weeks. Consumer beware. The cost of your initial loan is a $15 finance charge and 391 percent APR. Let’s say you extend the loan three times. You will end up paying $60 to borrow $100. It’s a fact—most payday borrowers cannot repay their loans in full at the first paycheck and renew the loan at maturity by paying additional fees and no principal reduction. Depending on the State in which you live, payday practices and fees will vary.

Do your homework!  Compare lenders by comparing APRs and other loan fees before deciding which payday or cash advance lender to do business with. 

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