A payday loan also known as a cash advance loan or check advance loan is a loan that does not require a credit check, but charges a very high interest rate. The person who is borrowing the money is asked to write a post-dated check for the money they want along. There will also be some service fees assessed. The lending company holds onto the check and only cashes it on the agreed upon date, or they will do a direct withdrawal from your bank account, whichever works best for you. It is not meant for long term financial goals.
The payday loan is usually transferred electronically right to your bank account, usually within a day or so. The payday loan payment with all of the accompanying fees are taken directly from your bank account on a regular basis. The interest rates can be extremely high. It is for this reason that you should be fully aware of what you are getting in to when you attempt a payday loan.
How Does a Payday Loan Work Exactly?
Payday loan companies will ask to look at your paystubs (at least three different ones) and then they will plug it into some proprietary software that will tell them your ability to repay. Most don’t require a credit score or credit report. They charge high interest rates which cover their expenses to recover their loan in case you default.
When you apply for and are given a payday loan, you will get to decide on your payment date, the term length of the loan, and will agree upon the interest rate. There may not be much room for negotiation on the interest rate, but everything else can be discussed.
The Federal Truth in Lending Act states that these payday loans are legitimate loans and like all other types of extended credit the lenders have to tell you what it is going to cost you to borrow the money. In other words, they have to disclose how much you are going to be paying back. So, for example, let’s say you borrowed $5000.0 dollars. With their interest rate you have to not only pay back $5000.0 but five thousand plus $350 dollars’ worth of interest, as well as fees.
The Bottom Line
Payday loans can get you into trouble fast if you are not smart about it. Have a plan going in to it for how you are going to repay the loan and don’t take out more than you can realistically pay back over time. Keep in mind that going further into debt is never the best course of action. For more information on payday loans go to: www.consumer.ftc.gov