Payday loans, sometimes also called
paycheck advances or payday advances, are small, short-term loans that allow
borrowers to cover expenses until he or she receives the next paycheck.
This type of lending has come under
a bit of scrutiny lately, as many unscrupulous individuals began taking
advantage of borrowers. Because of this, some jurisdictions have imposed strict
usury limits on the annual percentage rates that can be charged. Other
jurisdictions have banned the practice of payday lending all together, while
still others do not police the industry at all. Since the nature of payday
loans is very short-term, there can be a significant difference between the
annual percentage rate (APR), and the effective annual rate (EAR). This is due
to the fact that EAR compounds the interest, which can cost a great deal more
to repay.
Payday loans are typically issued
through a retail outlet. The money is issued immediately with no background or
credit checks, and is due in full at the time of the borrower's next paycheck
(typically a term of no longer than two weeks). The finance charges on these
loans are quite high and can be anywhere from fifteen to thirty percent of the
amount borrowed for the two week period. This ends up calculating out to be an
APR of anywhere from 390 to 780 percent. Terms are set in place by the borrower
writing a postdated check to the lender for the full amount of the loan plus
the applicable fees. When the loan is due to be repaid, the borrower is to
return to the store to repay the loan in person, or else the lender will cash
the postdated check.
In the event that the person does
not return to the store to pay, and the postdated check bounces, the borrower
will face extra fees from their bank, extra fees and interest charges from the
lender, on top of the original amount owed.
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