What is a Payday Loan?

A payday loan refers to a short-term loan in which the lending party gives an extension for high interest loan depending on the income and credit rating of the borrowing party. Such type of borrowing generally involves a chunk of the next months salary or income of the borrower. Such loans, being short-term in nature, carry high rates of interest. A payday loan is also known as cash advance or check advance loan.

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How Does a Payday Loan Work?

Payday loans ask borrowers to pay higher interest rates than usual loans. Some people can also refer to them as predatory borrowings because of the presence of excessively high interest rates followed by additional fees that are not disclosed beforehand.

Obtaining a Payday Loan

Parties or institutions that grant payday loans are usually small-scale credit merchants having their independent setups for approving loan-based requests therein. Besides onsite setup, there can be many e-lenders availing the services of payday loans to borrowers. At the time of applying for a payday loan, the borrower is required to attach paystubs of their current job as an evidence for exhibiting income levels. Lending parties usually estimate the short-term income of the borrowing party, and derive the amount of loan principal accordingly. There are some parties that ask borrowers to keep their wages as collateral. There are several factors such as the credit history of the borrower, his or her credit score, etc. that help in ascertaining the terms and conditions of the payday loan.

Payday Loan Interest

The interest charged by lenders for payday loans can be really high, sometimes ranging up to 500% in annual percentage yield. Majority of provinces have passed laws for restricting interest rates to a maximum of 35%. However, payday lending parties, having exempted from these laws, can charge higher interests. Persons who are planning to borrow such loans need to be cautious as these loans have many drawbacks attached. Different states have different policies and standards for payday loans, and there are also some states that have banned such loans. For instance, in California, a person issuing a payday loan charges 459% interest rate on a 14-day loan of $100. Besides, the borrower can also be asked to pay finance fees ranging up to $18 for a loan of $100. Though federal Truth in Lending Act asks lenders dealing with payday loans to mention finance charges, there are many borrowers who fail to notice these costs. These loans are usually issued for a period of up to 30 days for enabling borrowers fulfill their short-term obligations. Borrowers can obtain payday loans for amounts varying from $100 to $1500. Sometimes, borrowers for payday loans can convert into the repeated customers. After the global financial crisis of 2008, many lawsuits have been filed against payday lenders for not keeping a sense of transparency and integrity towards borrowers.