Payday loans, small, unsecured, short term loans, have been the saving graces of many stuck in tight financial spots. We’ve all had something come up: an unexpected car expense, emergency medical care, or some other situation that leaves you strapped for cash until your next payday. Payday loans are designed to mitigate those situations, providing borrowers with enough cash to get through the week.
The Process
There are two ways to get payday loans. One is to visit a payday loan storefront where the lender asks you to write a check for the amount of the loan, plus fees. The amount requested, which is usually fewer than $200, is then given to the borrower with the understanding that he or she will pay the loan back on a predetermined date, usually his or her next payday falling between 13 and 30 days. In the case that a borrower is paid monthly and his or her next payday is more than 30 days away, the loan will be due in 30 days. If the borrower doesn’t repay the loan, the lender can cash the check written for the loan amount and additional fees.
Online payday loans use a similar process. Borrowers visit a site for online payday loans and provide credit card information. The loan is directly deposited into the borrower’s account, and the repayment amount is extracted on a predetermined date.
In either situation, some verification of employment or income is usually provided, such as pay stubs or bank statements. They can be brought to payday loan locations or faxed in, in the case of online payday loans.
Laws and Stipulations
To prevent usury, excessive interest rates, certain jurisdictions limit the APR that any lender can charge. There are also limits placed by some states about how much a borrower can take out. For example, the State of Illinois allows a maximum of $1000 or 25% of the borrower’s monthly gross income, whichever is less. On the side of the borrower, there are rules stating that any bounced checks written to a payday loan establishment will end up on the borrower’s ChexSystems file.
Praise for Payday Loans
A study by the FDIC Center for Financial Research found that the operating costs are not that out of line with the size of the fees attached to payday loans. Loan losses can average 15% or more of loan revenue, so the interest rates charged are not really so extreme. The availability of payday and online loans also creates a place for those with poor credit to legally acquire money in emergency situations. It can be argued that payday loans prevent acquisition of money through illegal methods. Others have pointed out that payday loans raise household welfare, justifying their existence.
Criticism of Payday Loans
There has been some concern expressed over payday loans and online loans. Because many who use them are low to middle income persons with few assets, they are usually able to secure normal, low interest rate forms of credit. Some payday lending operations charge higher interest rates, so it has been charged that they deplete the assets of low income communities. It has also been charged that collection practices are too aggressive. A small percentage of payday lenders have, in the past, threatened late borrowers with criminal prosecution for check fraud. Such practices have been banned in many jurisdictions, however.
Though they should certainly not be abused, payday loans can be very useful to those stuck in the unenviable situation of being broke. Next time you aren’t sure where your utility bill is going to come from, remember that you have options in payday loans.
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