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What Is a Payday Loan?

Payday loan places have sprung up in recent years in many neighborhoods. These establishments attract people with promises of getting their hands on quick cash with a loan that can be paid off with their next paycheck. But payday loans come with a hefty price and it's important to understand exactly how they work before committing to one.

Cash Advance Stores Proliferate

Whether you know them as check cashing, cash advance, or payday loan stores, these financial establishments are booming in many areas. While they weren't very common 15 years ago, they now outnumber fast food restaurants in many areas. Some people have complained that payday lenders target urban, minority, and low income areas. Many senior citizens who have trouble covering their expenses are also using payday loans.

Web sites offering quick cash advances also have proliferated. Part of the appeal of payday loans stems from the fact that you can usually get one--even with bad credit--as long as you have an income from a job or government benefits. Also, because most of these loans are for a short term of seven to 20 days, there usually is no credit check. So if you're broke and desperate for some cash, most payday lenders are more than willing to help you out.

The Payday Loan Process

If you choose to use a payday lender you'll be asked to write a check for the amount you want to borrow, plus a fee for the service. Then the lender will advance you the amount of the check minus the service charge. Generally, the fee will be a percentage of the amount borrowed or a flat fee based upon the amount. If you choose to roll over the loan at the end of the term, you'll pay a fee each time the loan is extended.

Very High Interest

Part of the problem with payday loans is that the amount of interest charged to borrow money is extremely high. For instance, if you were to borrow $100 for 14 days and wrote a check for $115 to include a $15 fee, you'd have a 391% annual percentage rate (APR). If at the end of the 14 days you chose to roll over the loan you'd pay another fee. Because of these high interest rates many consumer advocates consider these loans to be predatory and have pushed for better legislation to control payday loan practices. Several states ban cash advance loans and legislation has been passed to restrict interest rates on loans to people in the military.

If you're considering a cash advance, you may want to rethink your choice before you get caught up in an endless cycle of fees. According to the Center for Responsible Lending (CRL), payday loans cost Americans $4.2 billion a year. If you think you'll be different and will only use this service once, keep in mind that the CRL reports that 90% of lenders' business stems from borrowers who receive five or more loans a year.

New York Times
Federal Trade Commission
Center for Responsible Lending
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