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. They are intended to help consumers get some quick cash to hold them over until their next paycheck, hence the name “payday loan.” Payday loans are also called cash advance loans, deferred deposit loans, post-dated check loans, or check advance loans.
Consumer Financial Protection Bureau
Per the Consumer Financial Protection Bureau or CFPB, most payday lenders only demand borrowers meet the following conditions to qualify for a loan: the 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.
When the loan comes due, the borrower either pays off the loan, allows the lender to cash the post-dated check, or writes another post-dated check to cover the amount of the loan. Many borrowers run into financial trouble with these kinds of loans when they can’t pay them off when they first come due. Each time the borrower extends the loan, more fees are tacked on.
Payday loans are accessible to consumers with poor credit and usually, do not require a credit check. About 12 million Americans use payday loans each year, and most of them do not have access to a credit card or savings account, according to the Pew Charitable Trust.
Payday loans are expensive and in states like New York, are banned.
Payday Loan Amounts
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 amounts can vary from $50 to $1,000, depending on state law.
Payday Loan 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.
Because of the high interest rates, payday loans are the most expensive way to borrow money. Some states have laws regulating how much payday lenders can lend and how much they can charge for loans, while other states, like New York, ban the practice of payday lending altogether. In those states in which the practice is banned, lenders often get around the regulations by partnering with banks in other states.