A payday loans is a short-term loan that bridges the gap between the borrower's cash flows and paydays. It also helps in avoiding penalties on late payments, and negative marks on credit ratings.
A payday loans is also called paycheck advance, cash advance, check advance loans, post-dated check loans or deferred deposit check loans. The term 'cash advance' also refers to the cash provided against a pre-arranged line of credit.
As per the norms given under the 'Truth in Lending Act', the cost of payday loans should be revealed. The borrower shall receive the finance charges and the annual percentage rate (APR) in writing from the lender.
payday loans are granted in cash. The borrower's post-dated check makes the loan secured and safe. The post-dated check incorporates the original loan principal and the accrued interest. The date of maturity often overlaps with the borrower's next payday. At the maturity level, the lender processes the check. He may do this either manually or through electronic withdrawal from the borrower's checking account. The checking account carries demand deposits, and other such deposits on which a check can be drawn.
The borrower issues a personal check to the lender. The company gives the check amount after deducting a fee to the borrower. The fees on payday loans are based on the face value of the check.
Small lenders and large financial service providers also offer payday loans. Small lenders operate on small stores or franchises. Large financial service providers offer different schemes on payday loans. Many banks offer a scheme of "direct deposit advance". This scheme is specially meant for customers whose paychecks are deposited on an electronic basis. In this type of loan, a consumer requests for direct deposit loan and get the advance. On the next direct deposit into the borrower's account, the bank removes the advance amount. A fee is also charged for the same. Many income tax preparation firms form a strategic alliance with lenders and offer 'refund anticipation loans' to the applicants.
A payday loan is a type of "sub prime lending" which carries high interest rates. Therefore, it
faces many criticisms and has become a matter of controversy. According to some critics, some lenders focus on young and poor people who stay near military bases and in low-income communities, for the grant of loans. They do not realize the time value of money. Many payday lenders have been accused for pursuing criminal bad check charges intentionally. Some critics argue that the interest rates on payday loans can be highly discouraging to the poor, as he may not afford to apply for such loans because of high interest rates.
Many people prefer payday loans. Processing costs for payday loans do not vary much from their higher principal. Conventional interest rates for shorter periods and lower amounts are not much profitable.
According to the FDIC Center for Financial Research, "Operating costs are a component of advance fees". After deducting fixed operating costs and unusual losses, payday loans may not essentially yield extraordinary profits. The underwriters of payday loans are also responsible for checking for any fraudulence because of bad checks or stop payments. Some people prefer payday loans to other loans because payday loans carry low interest rates, whereas, late payment charges are higher.
ALTERNATIVES TO PAYDAY LOANS
There are other options. Evaluate all the options before deciding to go for a payday loan:
.Shop carefully before finalizing on one option. You must compare different offers thoroughly before fixing your mind on one. Choose a credit offer that offers the lowest APR. Be aware with all the terms and conditions. Many local-community based organizations also grant small business loans to individuals.
.You must thoroughly analyze the 'Annual Percentage Rate' and the finance charges of different credit offers.
.You may request your creditors to extend the credit period. Find out the charges applicable for the same. Find out the extra charges applicable on late payment. Enquire if late payments carry higher interest rates.
.Draft an active budget and an estimated budget of all your monthly and daily expenditures to analyze your requirements. Do not make unnecessary purchases on regular items, as these costs will get added up. Build some savings to meet future emergencies. Small deposits also help in meeting unexpected expenses. Try to save as much amount of money as you can to kill your financial emergencies!
.Compare all the credit schemes and check if they provide you overdraft protection on your checking account. If you are a regular customer, it is likely that you commit a mistake in your checking account records. The overdraft protection would play a key role here. Overdraft protection will avoid future credit problems. If you find a scheme offering overdraft protection on your checking account, read the terms and conditions properly.
.Draft a debt repayment plan in consultation with creditors. If you cannot make a plan, you can seek the help of a local consumer credit counseling service. These counseling services are non-profit making groups available in every state. Look for the credit unions or housing authorities that offer free credit guidance.
.Finally, if you decide to use a payday loan, do not get over-excited while deciding the amount of loan. Borrow the amount such that you can afford to pay with your next paycheck and you have enough money for the next paycheck.
PAYDAY LOAN GLOSSARY
Paying off in regular installments over the term of the loan is termed as 'Amortize'.
The value that an asset gains over a period is termed as 'Appreciation'.
Annual Percentage Rate
It is an annual rate charged to a consumer for borrowing money. It is usually expressed as a percentage.
A check that is given to loan recipients to purchase a new or used vehicle is termed as a 'Blank Check'. It offers flexibility and convenience while shopping for a vehicle. It is valid up to an agreed upon amount. There's no obligation to use the check.
A decrease or loss in value of an asset due to obsolescence is termed as 'Depreciation'.
It is the charge for the privilege of borrowing money.
A legal claim on a piece of property until the debt or obligation is satisfied is termed as a 'Lien'.
A lien-free property is a property, which is owned outright by an individual, stating that individual on the title as the registered owner.
This ratio explains the relationship between the loan amount and the appraised value of the property. It is expressed in term of percentage.
It takes place when the loan amount on a property is greater than the value of the property.