What is a 'Payday Loan'

A payday loan is a type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash. The lender holds onto the check and cashes it on the agreed upon date, usually the borrower's next payday. These loans are also called cash advance loans or check advance loans.

BREAKING DOWN 'Payday Loan'

Although the federal Truth in Lending Act requires payday lenders to disclose their finance charges, these establishments have gotten a bad reputation for their predatory lending practices. Most borrowers using payday loans have bad credit and low incomes. They may not have access to credit cards and are forced to use the service of a payday loan company. Even if the borrower feels the fee may be fair ($17.50 per $100 for seven days), that translates into a rate of more than 900% on an annualized basis. Most loans are for 30 days or less and can be rolled over for additional finance charges. Loan amounts are usually from $100 to $1,500.

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