|
A payday loan is a small, short-term loan (typically up to $500) without a credit check that is intended to bridge the borrower's cashflow gap between pay days.
The loan is typically given in cash and secured by the borrower's post-dated check that includes the original loan principal and accrued interest. The maturity date usually coincides with the borrower's next pay day. On the maturity date the lender processes the check traditionally or though electronic withdrawal from the borrower's checking account.
Payday loan providers are sometimes compared unfavorably to loansharks due to their higher interest rates (300% APR and more), and in most US states payday loans are legal. Those who take payday loans are often perceived as being members of a lower socio-economic demographic who have few options other than such loans. Some argue that, like credit card companies, payday lenders take advantage of the poor and those who do not understand the time value of money.
Defenders of the higher interest rates note that payday loan processing costs do not differ much from their higher-principal, longer-term counterparts such as home mortgages. They argue that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would only generate 38 cents of interest, which would fail to match loan processing costs. They also argue that the interest on a payday loan is less than the costs associated with bounced checks or late credit card payments. They also argue that the interest cost accurately reflects the increased risk of default, a concept known as risk based pricing.
Most mainstream banks have not entered the payday loan business, but many offer a variation called a "direct deposit advance" which is a payday advance for those who receive direct deposit.
External Links
|
