A:

Payday loans, also known as cash advances, are short-term, low-balance, high-interest loans typically at usury rates that are so-named because of a tendency for the funds to be borrowed on a post-dated check that is cashed on the borrower's upcoming payday. These loans are designed to be quick and easy and generally have very limited qualification loan requirements.

Per the Consumer Financial Protection Bureau, or CFPB, most payday lenders only demand that the following conditions be met for a person to qualify for a loan: borrower must have an active checking account; borrower must provide some proof of income; borrower must have valid identification; and borrower must be at least 18. The qualification and loan application process can be as fast as 15 minutes if you can quickly show you meet all of the requirements. In most circumstances, the borrower writes a check for the loan amount plus a lending fee, and the lender holds onto the check until a predetermined due date.

Qualifying loan amounts vary depending on the borrower's income and the payday lender, although most states have laws establishing maximum payday loan amounts. Some states even limit the ability of borrowers to have multiple outstanding payday loans in an attempt to keep consumers from borrowing large amounts at extremely high interest rates.

Loan requirements should not be the only consideration if you are thinking about a payday loan. In terms of annual percentage rates, or APR, it is not uncommon for payday loans to exceed 500% or even 1,000%. Even though business models and regulations limit the size and duration of payday loans, these types of loans are still an expensive alternative and should be undertaken with care.

RELATED FAQS
  1. Do payday loans hurt my ability to get a mortgage?

    Find out whether taking out a payday loan could harm your chances of being approved for a mortgage and how lenders find out ... Read Answer >>
  2. What is the difference between an in-store and an online payday loan?

    Learn important differences between online and in-store payday loan companies. Explore different charges made by companies ... Read Answer >>
  3. What are the differences between payday loans and cash advances?

    Learn how to differentiate between payday loans and cash advances, identify what risks are associated with each, and find ... Read Answer >>
  4. In what states are high-cost payday loans illegal?

    Learn which states permit high-interest payday loans. Explore the maximum rates permitted to be charged on a state-by-state ... Read Answer >>
  5. How can I use the correlation coefficient to predict returns in the stock market?

    Read about simple interest loans, how they function, and some of the loan products or contracts that are most likely to carry ... Read Answer >>
  6. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
Related Articles
  1. Personal Finance

    Payday Loans Don't Pay

    Hold too tightly to this rescue line and you'll soon be drowning in debt.
  2. Personal Finance

    Beware of Guaranteed Payday Loan Websites

    Payday lenders generally should be approached with caution; but online payday loan websites are better avoided altogether.
  3. Personal Finance

    5 Reasons To Avoid Payday Loans

    Although payday loans may seem like an attractive option in a pinch, they may also leave you worse off in the long run.
  4. Personal Finance

    The Best Alternatives to Payday Loans

    If you are short on cash a week or more before your next paycheck, you may consider taking out a so-called payday loan. There are better alternatives to payday loans, including the 12 described ...
  5. Personal Finance

    Title Loans vs. Payday Loans: Which Are Better?

    Both title loans and payday loans carry risks that outweigh the benefits.
  6. Personal Finance

    Will Installment Loans Be the New Payday Loans?

    Payday lenders are leaning toward installment loans as a result of proposed federal regulations. But is this what's best for consumers?
  7. Personal Finance

    Why a Credit Card is Better than a Payday Loan

    Compare and contrast credit cards with payday loans, and understand why payday loans should be a last resort when you are in a pinch and needing money.
  8. Investing

    Banks Call for Looser Payday Lending Rules

    Large banks want to be more included in the market for offering short-term, high-interest loans.
  9. Insights

    Google Bans Ads for Payday Lenders (GOOG, GOOGL)

    Beginning in July, Google will ban lenders that charge annual percentage rates higher than 36%, since "these loans can result in unaffordable payment and high default rates for users."
  10. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
RELATED TERMS
  1. Payday Loan

    A type of short-term borrowing where an individual borrows a ...
  2. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
  3. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  4. Origination

    The process of creating a home loan or mortgage. During the origination ...
  5. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  6. Loan Officer

    Representatives of banks, credit unions and other financial institutions ...
Trading Center