Payday loans (also known as cash advance loans, check advance loans, post-dated check loans or deferred deposit loans) promise cash fast.
Here’s how they work: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the amount borrowed — less the fee — into the borrower’s checking account electronically. The loan amount is due to be debited the next payday.
The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”
This is a very expensive credit. For example, say you need to borrow $100 for two weeks and decide to get a payday loan. You would be writing a personal check for $115 with a $15 fee to borrow the money. The payday lender would agree to hold your check until you get paid again. When you do, the lender either deposits the check and you redeem it by paying $115 in cash or you rollover the loan and are charged another $15 to extend the financing for 14 days.
If you agree to electronic payments instead of a check, here’s what would happen on your next payday: the company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.
Before you decide to take out a payday loan, consider some alternatives.