What Is a Payday Loan?

Payday loans are short-term loans that usually come with high interest rates. Borrowers may take advantage of such loans when in need of quick cash and with the intention of repaying the loan fairly soon. People usually borrow small amounts of money (from $100 to $500) against an upcoming paycheck.

What Are Some Alternative Names for Payday Loans?

Payday loans are also known as cash advance loans, post-date check loans, check advance loans, and deferred deposit loans. Payday lenders are also commonly referred to as check cashers.

Why Would Someone Want to Take out a Payday Loan?

People turn to payday loans when they have few alternatives. Payday lenders cater to consumers with bad credit or people who are not likely to qualify for a loan from a bank. Payday lenders do not require that borrowers prove their creditworthiness in order to get a loan.

In addition, payday loans are very fast. Some payday lenders allow people to walk in, sign over a check and walk out with money, all in the same day.

What Are the Requirements for a Payday Loan?

The requirements for a payday loan can vary. Some of the standard information that a payday lender may request from a borrower includes: home address, telephone number, name of employer, and bank account information.

The payday lender wants to verify that the borrower is employed and has a place to live, to get some sort of assurance that the loan and fees will be repaid. Payday lenders want to verify employment so they know that the borrower will indeed be getting a paycheck. Bank account information allows lenders to verify that the borrower actually has an account at a bank that will process the transaction.

How Do Payday Loans Work?

The standard method for getting a payday loan is to write a check payable to the lender for the amount to be borrowed, plus the lender's fee. The lender keeps the check and will cash it at an appointed time, usually after the borrower’s next payday (thus the name "payday" loan).

There are also payday lenders that work online. For these loans, borrowers do not have to apply in person, but instead apply online. If approved, the lender deposits the loan money into the borrower’s bank account via an automated transaction. When the loan is due, the payday lender will take the loan money and any fees from the account.

When Can a Payday Loan Be Helpful?

A payday loan is useful in an emergency situation when money is needed immediately, such as to pay for immediate repairs to a car or home. When used sparingly as a means to deal with a specific short-term crisis, a payday loan can be a helpful option.  

How Can Payday Loans Be Harmful?

A vicious cycle can begin when someone relies on payday loans to stay afloat. People who use payday loans and don't have the means to manage their finances can get in over their heads very quickly. For example, paying a $25 fee to get $100 for two weeks may seem like a good idea at the time, but borrowers must realize that they will be paying a much higher annual percentage rate (APR) for this money than they would with another form of credit.

For more information on the dangers of payday loans, read the Federal Trade Commission’s Consumer Alert on Payday Loans.

What Happens if a Person Cannot Pay the Loan Back by Payday?

Sometimes people who take out payday loans find that even with the loan they are unable to make ends meet. Some payday lenders will allow borrowers to extend the loan past the original end date for a fee. If a loan is extended numerous times, the borrower may ultimately end up paying fees that nearly equal the cost of the original loan.

Additional Resources:

• Americans for Fairness in Lending:  http://www.affil.org

is a nonprofit that raises awareness about predatory lending practices.

• Federal Deposit Insurance Corporation (FDIC) Guidelines for Payday

Lending: http://www.fdic.gov/regulations/safety/payday/

• Community Financial Services of America: http://www.cfsa.net/