A payday loan (also called a paycheck advance or payday advance) is exactly as it sounds… a small, short-term loan that is intended to cover a borrower’s expenses until his or her next payday.
Payday loans are only set up to cover the borrower until they receive the next paycheck from their job. It is typically only for a short term period of 7 to 14 days before payment in full is due. Legislation & Laws regarding payday loans can vary widely between different states and even different cities within a state.
There are some states and jurisdictions impose strict usury limits and limit the amount of interest a payday lender can charge. Some jurisdictions outlaw payday loans all together. Then some have very few restrictions on payday lenders.
Due to the extremely short-term nature of payday loans, the interest and APR can seem very extreme when compared to a traditional personal or signature loan that is normally spread out over a year or more.
In very simple terms for each $100 borrowed a typical payday loan could cost anywhere between $15, $20, $25 to as much as $35 depending on the company. So if you borrow $100 dollars today you are required to pay $115 dollars or as much as $135 dollars two weeks from today. This is why it is good to shop around and compare companies.
Loan Stores: Borrowers visit a payday loan store and secure a small cash loan, with payment due in full at the borrower’s next paycheck (usually a two week term). The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person, and the check is handed back. If the borrower doesn’t repay the loan in person, the lender may process the check traditionally or through electronic withdrawal from the borrower’s checking account.
If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay. For customers who cannot pay back the loan when due, it is always best to contact the payday loan company as soon as possible to workout an extension to keep from depositing the check.