Payday Loans and How They Work


Check cashing companies and certain finance companies along with some others are offering short-term loans at a high interest rate that are referred by various names such as cash advance loans, payday loans, check advance loans, deferred deposit check loans or post-dated check loans.

The loans allows the borrower to write a post dated check out of their personal checking account that is made payable to the lending institution for the amount you wish to borrow along with a fee. The business then gives you the amount written on the check minus the fee charged. Most of the time, these fees charged for a payday loan is a percentage of the face value of the check or it may be a fee charged per amount borrowed. For example, for every fifty or hundred dollars borrowed they may charge a fifteen dollar fee and if you decide to "roll-over" or extend the debt for another week or two you will have to pay the fees for that extension.

Under the Truth in Lending Act in the United States, the cost of payday loans along with other types of credit) must be disclosed. Among other information they must provide, you also must receive, in writing, the finance charge associated with the loan and be informed on the annual percentage rate being charged.

A loan secured by a post dated personal check is a very expensive way to obtain credit. For example, if you write a post dated personal check for one hundred and fifteen dollars to borrow one hundred dollars for a period of up to fourteen days. The payday lender agrees to hold that check until your next payday. Depending on the terms of the loan, the lender will deposit the check on the date it was post dated for or you redeem the check by paying them the one hundred fifteen dollars in cash, or you roll-over the check by paying a additional fee to extend the amount owed for two more weeks. In this example, the cost of the initial loan is a three hundred and ninety one percent annual percentage rate with a fifteen dollar finance charge. If you roll-over the loan 3 times, the fee charged for financing would climb to sixty dollars to borrow one hundred dollars.

If you are caught in a payday loan web or trap and are unable to pay it back because you are afraid of what legal issues you might get caught in, then read our article on Not Paying Payday Loans.

Alternatives to Payday Advance Loans

There are other options to consider before choosing to take out a payday loan:

When you are need of credit, shop around to compare various offers of credit. Look for credit offers available to you that has the lowest annual percentage rate. You may want to consider a small loan from your local credit union or from a small loan company, a loan from family member or close friend, or a advance on your next paycheck from your employer. A cash advance taken out on a credit card may also be a possibility, but it usually have a higher annual percentage interest rate than your other sources where you may be able to get much needed funds. Find out the terms of the loan and before you decide. Also, a organization based in your local community may provide small business loans to individuals. Compare the annual percentage rate and the finance charges (this includes interest rate and other credit costs, and all loan fees) of credit offers to obtain the lowest cost loan.

You may also consider asking your creditors for additional time to pay your bills. Find out if they will charge you a late charge, a additional finance charge or a higher rate of interest.

Write up a budget that is realistic, and figure your daily and monthly expenses. Try to avoid unnecessary purchases even if they are small daily items. Their costs can add up. You will also want to build some savings and remember that even small deposits can help and add up. This will help to avoid borrowing for unexpected emergencies and expenses. For example, by putting away the amount of the fee in a savings account that would have been paid on a typical three hundred dollar payday advance, in six months time, you would have set a side extra dollars. This can give you a buffer against unexpected emergencies.

You can also find out if you currently have, or can apply for, overdraft protection on your personal checking account. If you are using most of the funds in your account on a regular basis and/or you make a mistake in your checking account or savings account records, overdraft protection can protect you from having further credit problems associated with additional fees. Find out the terms of the overdraft protection.

If you need help working out a repayment plan on your debt with creditors or developing a solid budget, contact a consumer credit counseling service in your local area. There are non-profit organizations in every state that offer credit guidance to consumers in need of help. This service is available at little or no cost. Also, check with your credit union, housing authority, or employer for a no cost or low cost credit counseling program.

If you decide you must use a payday advance loan, borrow only as much as you can afford to repay with your next paycheck and still have enough money left to make it to the next payday.

Finding lenders for Bad Credit Payday Advance Loans

Although all information is written in good faith and has been reviewed, please email us at [email protected] to report any inaccuracies.