Payday loans offer quick access to cash for customers who otherwise might have no access to credit. They have been in the spotlight recently due to their high APRs, fees and their prevalence near military bases.
A payday loan is a small short term loan of cash. Loans are generally made for no more than $500 and must be either repaid or refinanced on the borrower’s next payday, which may be no more than one month (sometimes two weeks) in the future. The loan is secured by a post-dated check from the borrower, which the lender will deposit if the borrower fails to pay on time.
Some payday lenders allow borrowers to refinance the loan simply by signing a new agreement and paying additional fees. Others require that the original loan be paid in full and a new loan made 24 hours later. Occasionally lenders allow borrowers to repay a portion of the balance along with new fees and refinance the remaining balance, but this is rare.
Who Uses Payday Loans?
Payday loans are relatively easy to obtain, making them a significant source of credit for low-income individuals. Generally, the only requirements are a checking account and proof of income, which may be from Social Security or other government benefits in addition to or in lieu of wages. There is generally a limit on the percentage of income that may be borrowed, but the borrower’s ability to repay is not a factor in approval. No credit checks are required, enabling those with poor credit to obtain payday loans.
What Are the Fees?
Payday lenders have long been accused of predatory lending practices due to what some consider excessive fees. The fee is generally no less than $15 per $100 borrowed, and in some cases much higher. If the borrower is unable to repay the loan and instead refinances, the total fees over a year’s time are often greater than a 400% annualized interest rate.
Advantages of Payday Loans
Payday loans can provide valuable additional cash to cover unexpected expenses such as car repairs or doctor bills. If the borrower is able to repay the loan in full, then the fee becomes a relatively minor convenience fee. Although people with a relatively high income and good credit have less costly alternatives, payday loans can be extremely important for those who live paycheck to paycheck.
Disadvantages of Payday Loans
For those with low incomes, it can be difficult to raise the necessary cash within two weeks or month allowed to repay the loan. The borrower may have no option but to borrow again. Repeated over time, this may result in the borrower repaying far more money than was originally borrowed.