What are Payday Loans?

Payday loans are sometimes called cash advances, and they are high interest and short-term loans that are meant to provide quick cash in between paychecks. When a person applies for a payday loan, they have to provide proof of identification and income (the latter is usually provided through pay stubs). In some cases, the borrower writes a post dated check that includes the amount they want to borrow plus any fees. The lender will give the borrower paperwork describing the loan's terms, such as late fees and interest and finance charges. Once they've signed these papers, the customer gets cash. In an ideal situation, the borrower repays the loan in full with their next paycheck; if they do not, the loan can be rolled over.

Most financial advisers discourage people from taking out payday loans. Because they are very short term, their annual percentage rate can reach an astounding 500%. If the loan is paid in full by the time the post dated check reaches maturity, the payday loan can be a convenient source of cash. However, if a borrower cannot repay the whole loan, the remaining balance accrues late charges and additional fees. If the loan rolls over three consecutive times, the interest accrued can equal or exceed the amount of the original loan. Most states don't have laws regulating payday loan interest rates, either.

While you may think that payday loan terms and conditions are overly strict, there may be circumstances under which they are a viable option. A lot of consumers live from one paycheck to the next, which means any emergency can mean financial ruin. Experts suggest that borrowers try to find alternatives to payday lending whenever they can; such as payment extensions or promissory notes. If a cash advance is your only option, only borrow what you can afford to pay in full with your next paycheck.

Payday loans should only be used in cases where there is no other option. Before signing for a payday loan, be sure to read its terms and conditions carefully. If your check is returned NSF, the lender will pursue all legal avenues in order to recover their money. These lenders benefit greatly from rolled over interest payments, so you should never borrow more than you can pay back.