What Are Payday Loans?

Payday loans are generally small amounted, short-term loans that are unsecured. These are loans that the borrower promises to pay out of their next scheduled paycheck or next regular income payment. These loans are usually represented to the borrower at a fixed-rate dollar fee. This fee includes the loan amount plus the finance charges. It tends to be an outrageous amount by the end. These loans have such a short term maturity the interest rate can vary anywhere from 300 percent to 1,000 percent!

These cash advance loans (which are secured by personal checks) are basically very, very expensive credit. Here’s a great example for you that will give you a good idea of what a payday loan is like: let’s say you write a personal check for only $115 to borrow $100 for up to 14 days. Sounds pretty reasonable, right? This check the casher or the payday lender agrees to hold until your next payday. At that point in time (depending on the particular plan, of course) the lender will deposit the check and you redeem the check by paying the $115 in cash or you roll-over the check by paying an extra fee to extend the loan for an additional two weeks. In this specific example, the cost of the initial loan was a $15 finance charge and a 391% APR. If you roll-over the loan three times the finance charge would eventually climb to $60 to borrow only $100.