Payday loans are short term cash loans that are given to borrowers against a
check or against access to borrowers account. Usually, borrowers write a
personal check for the amount they intend borrowing and hand it over to the
payday loan lender. This amount also includes the charges for the loan. Once
this formality is done with, the borrower is advanced the payday loan.
Occasionally, borrowers sign over access to their electronic accounts in order
to receive and repay the payday loan. The payday loan lender holds on to the
check till the borrower’s payday when the total loan amount along with charges
must be repaid to the lender. A borrower can redeem the check for cash, allow it
to be deposited in the lender’s bank or just pay the interest and roll the loan
over to the next payday.
Payday loans can range from $100 to $1,000 and have an average loan term of
two weeks. The average annual interest rate on payday loans is about 470%.
Lenders charge anywhere from $15 to $30 on every $100 borrowed.
Payday loans can be extremely expensive when compared to other cash loans. A
$300 cash advance on an average credit card which is repaid in a month’s time
would cost approximately $13.99 on finance charge and an annual interest rate of
almost 57%. In comparison, a payday loan finance charges on every $100 would
cost $17.50, and as a result the $300 would end up costing $105 if it is renewed
one time. In other words, the $300 would end up attracting 426% annual interest
if taken as a payday loan.
In order to obtain a payday loan, a consumer needs to have an open bank
account of good credit standing, a steady source of income and proof of
identification. Payday loans are usually made by payday loan stores, check
cashers and pawn shops. Loans are also made by rent-to-own companies and this
can be availed by a telephone or online.
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