Payday loans, also known as cash advance loans, check advance loans, post dated check loans, are small, short duration loans, which carries very high rate of interest in comparison to any normal loan. This kind of loan is offered by check cashers and finance companies that find this as quick and fast way to earn quick bucks, through the interest rate charged on the loan amount.
Everyday, you can hear and see lot of finance companies advertising in TV, radio, newspapers, and even internet about simple to get "payday loans". A payday loan is basically intended to help the borrower, bridge his or her cash flow in between the paydays.
How does it works:
A payday loan is given as cash by the lender, and is secured by the personal post-dated cheque issued by the borrower, payable to the lender. This cheque amount covers the original loan principal amount plus the interest amount accrued, as decided mutually between the borrower and the lender. The maturity date of the cheque is usually coincides with the borrower's next payday. In case, if the loan date is extended or "roll-over", than extra interest rate would be accrued for the extended days. The financial companies offering payday loans usually operate through small stores or as franchises of the big investment companies. Now days, even some big financial institutions and mainstream banks have started offering these loans, with a slight variation in their procedure of operation. For example, some mainstream banks offering such loans, offer a more convenient "direct deposit advance" to the consumers, whose paychecks are deposited electronically in their bank accounts.
The scenario of offering this kind of loan is legalized in Canada and around twenty-five states of USA. In the other parts of US, where it's still not legal, a payday lender is free to affiliate with any out of the state bank or financial institution to offer this kind of loan.
Controversial payday loan services:
The high rate of interest accompanying the payday loans has been a controversial issue
with many critics claiming that these kinds of loans usually target, young and poor people from low-income communities, who are not very well aware of the financial market and thus they easily fall in trap of these financial sharks. These poor people not being much educated and aware end up paying 250% more than the annualized interest. In some reported cases, that have come to notice, it has been seen that the payday lender institutions have pursued bad cheque charges against the borrower, deliberately to get more interest, despite the fact that they were aware that the cheque was bad since the time it was written. But they will hide the fact, till the time comes to redeem it, so that than can trap the borrower and bury him or her under a high interest rate amount.
It has been seen that for a loan of $ 100, unaware people ends up paying some where around $60, just as the finance charges. The defenders of the high rate interest rates justify it by arguing that these interest rates don't differ much from their higher-principal, long-term payable loans such as home mortgages. They also argue that the interest rate charged is still less than the interest rate charged on bounced cheque or late credit card payments and is based on risk based pricing, which is directly proportional to the increased risk of default. Risk based pricing is a term used by financial service institutions for the different rate of interest charged on the same principal amount, from different people, depending upon their credit score and other factors. Those with worse scores are charged high rate of interests while those with better scores are charged low rate of interests. Critics see this policy as a form of bait and switch, and consider it unfair in general. Economically disenfranchised people who end up paying high scores can end up being a part of vicious cycle, which will no doubt continue to keep them disenfranchised.
Saving your neck:
Now let's look at some remedies to save your neck from these loans: First and foremost is to be very careful while shopping. It's always advisable to compare offers and look for a credit card with the lowest Annual Percentage Rate (APR). Its always best to look for other possibilities like a cash advance from the employer, or a small loan from a friend, before considering the option of going for a payday loan. Always talk upfront with your creditors and ask for more time than you actually require for paying your bills. Always check beforehand, how much are they going to charge you for late fee, or additional finance charge