What are Pay Day Loans

Pay day loans are loans issued to a borrower, with an un-cashed check, or electronic access to a bank account from the borrower as collateral. Lenders will charge the amount of the loan plus finance charges to the borrower. Then they’ll hold the check or access to the bank account until the next pay day when the borrower needs to pay back the loan in full plus financing fees. If the borrower does not have the ability to pay back the loan entirely, he will be charged additional fees for another period.

What are Loan Terms and Fees associated with Pay Day Lenders?

Typical loan terms range in size from as little as a hundred dollars to upwards of a few thousand dollars. Loan size is determined by state law, where these lenders reside. Loan terms coincide with paycheck cycles, usually bi-weekly.

The average interest rate is around 400% annual percentage rate. There can be additional finance charges as well. Typically to borrow $100, a borrower can be charged $15 on top. Thus, the interest rate associated with this loan could be well over 600% interest.

Who Gets Pay Day Loans?

People who get pay day loans are those with extremely poor credit or no credit. People who need cash right away and don’t have another way of raising it. Taking a cash advance on a credit card is a much cheaper alternative than utilizing a pay day loan vendor. For a borrower to get a pay day loan, all one needs is a bank account and proof of income (usually a paycheck). Credit checks are not done, nor do lenders ask whether they can pay back the loan.

Who are Pay Day Loan Lenders?

These lenders can be made by pawn shops, check cashing companies, or loan stores. These types of loans can also be secured over the internet. There are approximately 20,000 to 25,000 pay day loan locations throughout the United States. Most are located in poorer locations. You will not find these businesses in upscale or affluent areas. These businesses do approximately between $25 and $30 billion dollars worth of loan each year. The Internet is a growing pay day market, and it’s estimated that $7 billion dollars of loans were made in 2008.

Pay day Loans: Are they regulated by the state?

The answer is yes and no. Thirty-five states have laws allowing pay day loans. Fifteen states have restrictions on what these firms can charge in fees and interest rates. Some states have instituted rate caps to protect consumers. Pay day loans are very controversial because of the short time span, very high fees, and interest rates.

Opponents of pay day lending insist that these firms take advantage of the poor. The poor, or those with no credit opportunities, will fall hopelessly in debt, if they cannot repay these loans in a quick manner. Since pay day loan companies do not perform credit checks, these borrowers are more likely to file for bankruptcy than other types of borrowers. Pay day lending companies insist that they need to charge these high fees to cover those individuals who will default on their loans.