What are Payday Loans?

Payday loans are sometimes referred to as cash advance loans, and they are high interest, short term loans intended to provide quick cash to tide a person over until their next paycheck. To get a payday loan, the customer has to provide valid ID and proof of their income (such as previous pay stubs). They then write a postdated check to the payday lender, which includes the amount of the loan and a predetermined fee. The lender then provides the customer with paperwork outlining the terms of the loan, such as finance charges, late fees and annual rates. When the customer signs the papers, they get their cash. In an ideal situation, the customer pays the loan in full with their next paycheck, but if they cannot, the loan will likely be 'rolled over' or extended.

Most financial experts try to discourage people from using payday loans. Because they have such a short term, their annual percentage rate can approach an astounding 500%. If the whole loan is paid by the date on the customer's check, a payday loan can be a good (albeit expensive) way to get quick cash. However, if the entire loan is not paid off, the balance accrues high late fees and interest charges. If the loan rolls over three or more times, the interest accrued can exceed the amount of the original advance. Most states in the US do not have regulations on the interest rates that payday lenders charge.

While their terms may seem excessively harsh, there are circumstances under which a payday loan could be a viable option. A lot of people live from one paycheck to the next, which means that any sudden expense could spell financial ruin. The only way for many of these people to get the cash they need may be a payday loan. Financial experts say that consumers should find alternative financing options, such as a payment extension or promissory note.

Payday loans should only be used in cases of dire financial need. Before signing any paperwork, be sure to read all its terms and conditions. If you default on a payday loan, the lender will pursue all legal avenues available when the check is returned. These lenders make their money when loans roll over, so don't be tempted to borrow more money than you can repay with your next paycheck.