A payday advance loan is a type of short-term loan that provides high-interest credit based on your income. It is also known as a cash advance loan or check advance loan. The loan is usually secured by a post-dated check for your next payday wages, and the lender will provide you with part of that sum in advance. Payday loans are characterized by high interest rates and are typically due within two weeks or close to your next payday.
The annual percentage rate (APR) for these loans can be as high as triple digits, making them an expensive option for short-term credit. The Military Annual Percentage Rate (MAPR) cap of 36% has been expanded to include a wider range of credit products, including payday loans, vehicle title loans, application loans, deposit advance loans, installment loans and lines of credit open without guarantee. Applying for a payday loan does not affect your credit score or show up on your credit report since lenders do not usually perform a credit check. Proponents of minimum regulations for payday loan companies argue that some people who require the use of payday loans have already exhausted other alternatives. Some jurisdictions prohibit payday loans altogether, while others have very few restrictions on payday lenders.
Payday loans are extremely expensive and borrowers are at a disadvantage compared to the lender, as the normal asymmetry of consumer loan information is reversed. Some states do not have payday loans because they are not allowed by state law or because payday lenders have decided not to do business at the interest rate and fees allowed in those states. Payday loans are available through payday lenders in stores or online, depending on your state's law. These small, high-cost loans typically require payment within two weeks or close to your next payday. Payday lenders often rely on regular customers, often low-income minorities, who charge exorbitant compound interest on cash advances. The CFPB found that 20% of payday borrowers defaulted on their loans, and more than 80% of payday loans contracted by borrowers were extended or re-borrowed within 30 days.
Payday lenders may also offer longer-term payday installment loans and request authorization to electronically withdraw multiple payments from the borrower's bank account. A payday loan may seem like the only solution to handling an emergency bill or paying off another debt, but it will end up costing you more than the problem you are trying to solve. Before taking out a payday loan, consider other options such as borrowing from family or friends, using a credit card cash advance, or tapping into your savings.
