- A payday loan is a loan that is made in much the same way as a traditional bank loan. Collateral used to secure the loan are funds from a customer's future payroll check. After a potential client completes a loan application, a lender will verify that he is employed and has an active bank account. Payday loan amounts, as in traditional financing, are partly determined based on the income levels of each applicant and his or her prior relationship with the lender. Credit report inquiries are not usually made by lenders who make payday loans. These loans are sometimes referred to as "bad credit" payday loans. They are also known as "cash store" and "cash advance" loans.
- Repayment schedules associated with payday loans may vary, depending on loan amounts. A customer may make a single installment to pay back the loan, or a series of installments based on their projected payday. To ensure that customers arrive to make payments, the lender will commonly hold posted-dated checks equal to each installment amount. If customers arrive to make the payments in cash, the lender returns the post-dated checks to them.
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Payday loans are typically made at designated locations, sometimes known as "cash stores." Because of several laws prohibiting specific practices within the payday loan and cash advance industry, many states have forced many companies to cease doing business from physical locations. Several payday companies have since began operating online.
The online cash advance stores operate in relatively the same manner as retail locations. Customers complete online applications, providing the the lender with banking information including routing and account numbers. When loans are approved, funds are wired directly into the bank accounts of customers. With online loans, repayment is made by electronic bank drafts that customers agree to at the time of application. -
If customers fail to make payments in person, lenders usually will attempt to cash the post-dated checks to be paid. If any of the installment checks are returned due to insufficient funds, the lender would then have the right to recover any returned check fees, hire a collection agency or recover the loan amount, in addition to other fees, in small claims court.
The same is true if funds are not available in a customer's bank account at the time an online lender attempts to electronically receive payment. Both situations often end miserably for customers. Overdrawn accounts, overdraft fees and returned check fees are common when payday loan clients fail to make prearranged payments. It is also not uncommon for banks to close the accounts of delinquent customers, making it extremely difficult to open future accounts within the banking community.
Payday loans are also, almost always, very expensive. It is not common for an Annual Percentage Rates (APR) on payday loans to be as high as 500 to 700 percent. For example, if a customer borrows $100 and is charged a $25 finance charge ($25 per $100 borrowed for a 14-day loan), the APR would be 650 percent.
Payday lenders, at times, will allow certain customers to "roll over" their loans. This means that if a customer cannot make payments as scheduled, the loan would be re-amortized and start over. New finance charges are almost always added to loans that are rolled over for future repayment. -
Bad credit payday loans often seem attractive on their faces. However, research continues to show that such loans are highly specialized and are not meant to satisfy long-term personal financial goals. Federal and state laws have deemed many of the practices associated with this type of lending predatory in nature.
Some clients, do, however, find that using payday loans to borrow relatively small amounts ($50 to $100) to be beneficial for bridging specific gaps in pay periods. It is, therefore, recommended to use extreme caution in borrowing money from payday loan institutions.
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