A payday loan or cash advance is a small, short-term financial instrument that allows a borrower to cover his or her expenses until the next paycheck.
Typically, the amounts of such loans range of $100 to $1500, on 10-14 days term and have enough high interest rates (APR) from 390 to 900 percent.
Payday lending is regulated at the state level - each state has its own laws regarding payday loans. Meanwhile, the U.S. Congress passed a law in October 2006 that limits lending to military personnel at 36% APR. The Defense Department was concerned that payday lenders could cause financial challenges for soldiers and even jeopardize security clearances.
Some federal banking regulators are trying to limit or prohibit payday loans not just for military personnel, but for all customers. The high interest rates are considered as a hard financial blow to the lower and middle class people who are the primary borrowers.
Lenders prove that payday loans are often the only available way to get money for customers with bad credit history or who can not obtain another lower-interest alternative, such as a bank loan or a credit card. In their turn, critics say that the most of borrowers find themselves in a worse financial situation when they have to repay their loan. Many of them get trapped into a cycle of unsecured debt.
Examples.
For example, a borrower wants to get a payday loan. The borrower will write a post-dated personal check for $500 to borrow $570 for up to two weeks. The payday lender agrees to hold the check until the borrower's next paycheck date. At that time, the borrower has the option to redeem the check by paying $570 in cash, or renew his loan by paying off the $570 and then immediately applying for an additional loan of $500, in result prolonging the loan for another 14 days period. However, in many states extending of payday loans is not allowed by state law. In states where there is an extended payment plan, the borrower could choose to opt into a payment plan.
The Consumer Federation of America has conducted a survey of one hundred internet payday loan websites recently. The results showed that these lenders offer loans from $100 to $1,500, with $500 the most frequently offered. Finance fees ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the payday loan is repaid within 14 days.
Alexander Maletin is a writer and online publisher. Visit his site at http://www.usaquickpayday.com
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