About Payday Loans

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By Diana Monda Dill
eHow Contributing Writer

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Also called a payday advance, check cashing or payroll advance, a payday loan is a small loan that is designed to be paid back within a short period of time, typically a few pay periods. It is a high risk, high cost loan, which doesn't require any credit checks.

Identification

A payday loan is intended to provide an emergency source of funds to cover the borrower's expenses until the next paycheck. A personal check is written by the borrower to the lender for the amount of the loan plus a fee for receiving the loan. This check is often retained by the lender, and held for the agreed upon period of time, after which they will cash the check or the borrower will return to retrieve the check and pay cash for the full amount.

Size

Payday loans usually range in size from $100 to $1000. The total amount that can be loaned out varies based on each state's governing legal maximums. The size of the borrower's paycheck also determines the amount of money that can be borrowed. This paycheck serves as collateral for the loan.

Warning

It is essential that the borrower read through the paperwork that accompanies these loans and all the information concerning the fees and finance rates that will be effective once the paperwork is signed and the money is received by the borrower. The amount of interest charged on payday loans is relatively high, and accounts for a lot of the criticism that is leveled at the industry. Usually, the shorter the loan period, the higher the interest rate that will be charged.

Time Frame

If one is unable to repay the Payday loan by the due date, the lender will usually extend the due date two or three times. However the fees and rates keep rising in the interim, continuing to accumulate without the borrower receiving any more money. Payday loans have a tendency to increase financial difficulties already apparent if used as a long-term option for quick money. As short term fix, these loans offer a convenient, albeit expensive, method for handling an emergency bill, if the borrower can re-pay it within the specified time.

Considerations

The requirements for procuring a payday loan are relatively minimal. These include merely having a current bank account without excessive negative activity for a specified period of time. This period of time is regulated by each office, but is usually in the range of about three months. Legal identification is another requirement, and consists of a driver's license, social security card, or immigration papers. A steady job is also required.