Payday loans are aimed at people with jobs and checking accounts who suddenly need fast cash. Often called a "cash advance," they are small-dollar, short-term loans made without a credit check. As their name implies, payday loans are often used to bridge a borrower's cash-flow gap between paychecks: borrow today and repay when paycheck comes, using a post-dated check as collateral.
Typically, payday loans are written for less than $500. The loans are granted for periods as short as one or two weeks, at fees of $15 to as much as $30 per $100 borrowed. When interest and fees are calculated, payday loans are very expensive compared to other types of financing, including credit card cash advances. According to the Consumer Federation of America, annual interest rates exceeding 2,000% on payday loans have been documented, so it is important to know the terms of the lending agreement. Also, if you can’t pay, you are subject to criminal prosecution for passing a bad check.
The worst part of the payday lending process is the "cycle" into which the borrower may become trapped. For those who can't pay the loan in full at the end of two weeks, the loan must be renewed for the same amount that was originally borrowed plus another interest fee is charged that puts them farther in debt.
Until recently, payday loans were principally aimed at the working poor. Now, payday lenders are setting up shop in the suburbs and near military bases and college campuses. Rightly used, they fill a niche that banking institutions don’t. But they can also produce a treadmill of debt, when loans are "rolled over" and another fee is charged.
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