Although defined broadly, payday loans are basically small monetary loans that individuals typically apply for and attain when they are in immediate need of money. Typically, payday loans constitute a short term loan (with a time period of about two weeks) for a relatively small amount of money-generally a few hundred dollars. In order to obtain a payday loan, people will typically write a check covering the amount they borrow as well as fees. The borrower will then leave this check with the loan company, and the lender will cash the check on the repayment date.
Typically, a payday loan lender will provide the borrower with clear information regarding when repayment is due and what form the repayment will take. In the event that the borrower cannot repay the loan, she or he will often be able to "roll over" the payment such that charges continue accumulating.
Typically, payday loans cost a lot of money. Specifically, the borrower will generally wind up paying an APR which could total several hundred percent of the loan amount. For example, you might be charged a $20 fee in order to borrow $100 for a two week period. The Consumer Federation of America has provided the public with clear calculations regarding APR rates, and they indicate that people pay about 426% APR on payday loans. However, it is not unheard of for an individual to pay an APR that exceeds 1000%.
The primary disadvantage resulting from the use of payday loans is the costs involved. Ultimately, these high fees make it relatively difficult for people experiencing financial difficulties to solve their economic issues. Thus while using a payday loan once or twice in your life may provide a quick fix for a temporary problem, regular use of payday loans can set a person up for financial hardship.
Yet another disadvantage that can result from the use of payday loans are the financial challenges that can result if your repayment check bounces. If your check bounces, this fact can be reflected in your ChexSystems file and subsequently entail overdraft fees from your bank. If this happens, retailers and banks might not be willing to do business with you. Additionally, the lender can have your account transferred to collections or sue you. Either of these acts can negatively impact your credit.
If you have given any consideration to obtaining a payday loan, reviewing the information found above can provide you with a basic understanding of how they work as well as the advantages and disadvantages associated with them. Upon reviewing the information found above, you can determine whether utilizing a payday loan would be appropriate for you.