To cover an urgent expense until their next paycheck, borrowers often turn to payday loans. These cash loans of short duration, which generally function as an emergency funding source, are usually granted on a two-week term and paid in full on the borrower's next payday. Typically, a payday cash advance is for an amount ranging from $100-$1500.
Upon repayment of the payday advance, the borrower pays a fee depending on the amount loaned. The consumer is ordinarily charged a fee amounting to 25-30% of the sum borrowed. The yearly interest rate on a payday loan is usually anywhere from 390 to 900 percent. How much interest a borrower will pay on his/her payday cash loan will vary from state to state. Lenders impose finance charges of $15 to $30 for every $100 loaned; this equates to an APR (annual percentage rate) of 390 to 780 percent, respectively.
Payday advance lenders conduct minimal diligence to determine whether a consumer will be able to pay back the loan. The sole requirements that a borrower must satisfy to obtain a cash advance payday loan are 1) employment with a minimum monthly income of $1,000, which he/she can prove by submitting a few recent paycheck stubs, 2) a bank account in the United States, 3) proof of residency, 4) proof of identification, and 5) minimum age requirement (18 years of age). A borrower can complete and submit the payday cash advance application either online, via fax, by telephone, or in person by walking into a quick payday loan store.
The Benefits of Payday Loans:
- A payday advance loan offers borrowers numerous benefits, including the following:
- The convenience of filling out the forms online or by fax
- The opportunity to improve their credit score
- Comprehensive online services
- An application that is easy to understand
- A process that is free of charge
- An evaluation process that is neither long nor stringent, as is the case with other lending institutions
- A waiver of the credit check requirement since most cash advance stores will not look into a borrower's credit history before issuing the loan
- The absence of a collateral requirement
- The absence of a co-signer requirement
- Easy qualification for the payday loan
- Approval notwithstanding a charge off, bankruptcy, or other credit issues
- Prompt processing (in some cases, the online process lasts 2 minutes or less)
- Instant application approval by most payday cash advance companies
- 24/7 availability of service and loan processing
- Receipt of online cash advance funds in borrower's bank account by the following business day
- Flexible repayment options
- Welfare-enhancement
Economic research has shown that consumer credit, even when boasting an elevated interest rate, usually improves welfare. New York's Federal Reserve Bank issued a report stating that payday loans should not be labeled "predatory" because it potentially contributes to household welfare.
The Purpose of Payday Advance Loans:
A borrower will find that a payday cash loan can serve multiple objectives. First, it provides a service that a consumer is unable to obtain from many lending institutions. Since the majority of banks do not extend short-term loans of a low dollar amount, a check cash advance fills a niche in the marketplace. Secondly, it provides a financial lifeline to individuals trying to cope with unexpected emergencies and to pay bills that need to be paid right away. A quick payday loan helps those whose credit cards are maxed-out and who lack sufficient funds to make it to the next paycheck. It also spells salvation for consumers with poor credit who are confronted with an urgent expense but do not qualify for a bank loan and cannot obtain a credit card or alternative lower-interest funding. A fast payday loan can also benefit credit-worthy individuals, since they too might find themselves ineligible for an ordinary loan due to inadequate assets and a lack of a steady income.
Thirdly, a cash advance payday loan can be applied towards any expenditure (i.e., tuition fees, medical bills, vacation, auto or home repair, and holiday purchases). The borrower is not required to justify the expense. Additionally, this short term loan offers assistance to consumers who, having failed to pay bills (rent or credit card, for instance) in a timely manner, face penalties or late fees.
A payday loan is known by the following alternative names:
- Post-dated check loan
- Deferred deposit check loan
- Paycheck advance
- Cash advance
- Cash advance loan
- Check advance
- Bad credit payday loan
- Payday cash loan
- Payday cash advance loan
- Payday advance
- Cash advance payday loan
- Payday cash advance
- Check cash advance
Payment Options:
The consumer can choose to pay back the cash advance loan in person. Otherwise, the payday advance company may process the check the standard way or by means of an electronic withdrawal from the client's bank account. If the borrower does not do anything, an auto-pay will kick in: The lender will automatically deduct a certain percentage of the payday loan amount, in addition to the finance charge that is owed. With each payment, the principal balance decreases until the cash advance loan is fully paid. Therefore, unless the borrower chooses a different payment arrangement, the lender will electronically debit the payments from the former's checking account.
The borrower has three different payment options:
- Pay the full loan amount on the due date
- Pay part of the loan (a portion of the principal and interest) on the due date
- Pay only the finance charges (fees and interest)
Cost Comparison:
A cost comparison of the annual rate of a payday loan to borrowing alternatives (i.e., bounced checks, late utility bill fees, credit cards) will demonstrate to the borrower that the interest rate on a check cash advance loan is considerably lower than that associated with the alternative funding sources. For instance, one missed credit card payment could negatively impact a consumer's credit rating. Numerous bounced checks could trigger substantial penalty fees.
What follows is a comparison, over a 14-day period, of a cash advance payday loan's terms with finance charges resulting from the borrowing alternatives:
- A borrower who takes out a $100 fast payday loan pays a $15.50 fee, which translates into an APR of 403%.
- A borrower with a $100 credit card balance pays a $29 late fee, which is equivalent to an APR of 756%.
- A borrower with a $100 utility bill pays $47 in reconnect/late fees, which translates into an APR of 1,225%.
- A borrower with a bounced check in the amount of $100 pays is subject to a $25 NSF (merchant or bank fee) and a $24 returned check fee, which amount to an APR of 1,278%.
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