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Wednesday, August 10th, 2011
A payday loan (also called a paycheck advance) is a small, short-term loan that is intended to cover a borrower’s expenses until his or her next payday.
The Payday Loan Process.
The basic loan process is simply that a lender provides a short-term unsecured loan to be repaid at the borrower’s next pay day. Typically, some verification of employment or income is involved (via pay stubs and bank statements), but some lenders may omit this. Individual companies and franchises have their own underwriting criteria.
The traditional retail model.
In the traditional retail model, borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower’s next paycheck. The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower does not repay the loan in person, the lender may redeem the check. If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay.
Online payday loans.
In the more recent innovation of online payday loans, consumers complete the loan application online. The loan is then transferred by direct deposit to the borrower’s account, and the loan repayment and/or the finance charge is electronically withdrawn on the borrower’s next payday. According to some sources, many payday lenders operating on the internet do not run credit checks or verify income.
The lenders therefore list a different set of alternatives (costs expressed here as APRs for two-week terms):
- $100 payday advance with $15 fee = 391% APR;
- $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
- $100 credit card balance with $26 late fee = 678% APR;
- $100 utility bill with $50 late/reconnect fees = 1,304% APR.
