Download Other loan features can vary. For example

Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is
also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or
unscrupulous actions for a loan that a borrower doesn't need, doesn't want or can't afford.
What is a Payday Loan?
Payday loans can be very costly. Borrowers should use them with caution and pay the amount back as soon as
possible. These loans are usually priced at a fixed dollar fee, which represents the finance charge to the
borrower. Because the loans have such short terms, the cost of borrowing is very high. In return for the loan the
borrower usually provides the lender with a pre-dated check or debit authorization.
How Does it Work?
Say your car broke down and you decide to borrow $300 for the repairs from a payday lender. You’ll write a
post-dated personal check for $340 (the amount plus a finance fee) made payable to the lender. You enter this
information online when applying for a payday loan through the internet. The lender then advances you $300
for a set period, usually 14 days. When that period is up, you pay the lender $340 in cash, let them deposit the
post-dated check or write another post-dated check for the amount plus an additional finance fee. If you do not
pay the debt in full at the end of the term, you will be charged additional fees and finance charges.
Who Uses These Types of Loans?
Generally, anyone with a checking account and steady income can obtain a payday loan. However, it is most
common for borrowers who don’t have access to credit cards or savings accounts to use this type of lender. Since
these loans don’t require a credit check, people with no credit or credit problems often turn to payday loans. Military
personnel and recent immigrants also commonly use payday loans.
What Are the Benefits?
Payday loans can be a good tool for quickly and easily borrowing cash during an emergency if you don’t have other
financial options. For example, you might use a payday lender for an immediate and temporary financial need such
as a medical bill, car repair or other one-time expense. Payday loans are helpful for people who don’t have credit
cards or savings available. Because the loans do not require a credit check, they are easy for people with financial
problems to obtain.
What Are the Negatives?
It is crucial that you repay a payday loan as soon as possible. Many people get into trouble with these types of loans
when they are unable to quickly repay the debt. If you can’t repay the loan at the end of the term, you’ll be charged
expensive additional fees. It is very costly to be stuck in a payday loan cycle for a long time and can lead to larger
financial problems. Payday loans are also much more expensive than other methods of borrowing money. In most
cases the annual percentage rate (APR) on a payday loan averages about 400%, but the APR is often as high as
5,000%. A standard credit card has an APR of 12% and a standard loan APR is around 7%. If possible, it is better to
use a credit card or tap into your savings in the event of an emergency.
People use payday loans to avoid borrowing from family and friends, and to avoid cutting back further on expenses. But
they often end up doing those things anyway to pay back the loan
Payday loans are marketed as an appealing short-term option, but that does not reflect reality. Paying them off in just two
weeks is unaffordable for most borrowers, who become indebted long-term
Even though borrowers complained that they had difficulty repaying the loans, most agreed that the terms of the loans
were clear. So why do they use such loans? Desperation, according to the report: “More than one-third of borrowers say
they have been in such a difficult situation that they would take a payday loan on any terms offered.”
What About Usury Laws?
Numerous states have very specific laws that regulate the lending industry. Called “usury laws” these regulations
define permissible lending terms and rates. Some states also have laws that regulate the amount a payday lender
can lend to consumers and how much they can charge for the loan. Other states ban payday lending outright, such
as New York. These laws vary widely. Payday lenders often work around these regulations by partnering with banks
based in other states, such as Delaware. It is important to read the fine print on the payday loan offer and
understand your consumer rights. You can read Credit.com’s summary of state-by-state payday loan restrictions
online.
Payday Loan Terms
Payday loans range in size from $100 to $1,000, depending on state legal maximums. The average loan term is about two
weeks. Loans typically cost 400% annual interest (APR) or more. The finance charge ranges from $15 to $30 to borrow
$100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have
even higher APRs.
Cost Compared with Other Cash Loans
Payday loans are extremely expensive compared to other cash loans. A $300 cash advance on the average credit card,
repaid in one month, would cost $13.99 finance charge and an annual interest rate of almost 57%. By comparison, a
payday loan costing $17.50 per $100 for the same $300 would cost $105 if renewed one time or 426% annual interest.
Requirements to Get a Payday Loan
All a consumer needs to get a payday loan is an open bank account in relatively good standing, a steady source of
income, and identification. Lenders do not conduct a full credit check or ask questions to determine if a borrower can
afford to repay the loan.
Debt Traps
Payday loans trap consumers in repeat borrowing cycles due to the extremely high cost of borrowing, the very short
repayment term, and the consequences of failing to make good on the check used to secure the loan. Consumers who
use payday loans have an average of eight to thirteen loans per year at a single lender. In one state almost sixty percent
of all loans made were used to cover the prior payday loan transaction; either through renewals or new loans taken out
immediately after paying off the prior loan.
Risk and Cost of Checks for Loans
Every unpaid loan involves a check that is not covered by funds on deposit in the borrower's bank account. Failure to
repay leads to bounced check fees from the lender and the consumer's bank. Returned checks cause negative credit
ratings on specialized databases and credit reports. A consumer can lose her bank account or have difficulty opening a
new bank account if she develops a record of "bouncing" checks used to get payday loans. Research indicates that
payday loan users are almost twice as likely to file for bankruptcy as borrowers who are turned down for a payday loan.
Coercive Collection Tactics from Check Holding
Basing loans on personal checks leads some lenders to use coercive collection tactics. Some lenders threaten criminal
penalties for failing to make good on checks. In some states lenders sue for multiple damages under civil "bad check"
laws.
Internet Payday Lending
Internet payday lending adds security and fraud risks to payday loans. Consumers apply online or through faxed application forms.
Loans are direct deposited into the borrower's bank account and electronically withdrawn on the next payday. Many Internet payday
loans are structured to automatically renew every payday, with the finance charge electronically withdrawn from the borrower's bank
account.
Although the federal Truth in Lending Act requires payday lenders to disclose their finance charges, these
establishments have gotten a bad reputation for their predatory lending practices. Most borrowers using
payday loans have bad credit and low incomes. They may not have access to credit cards and are forced
to use the service of a payday loan company. Even if the borrower feels the fee may be fair ($17.50 per
$100 for seven days), that translates into a rate of more than 900% on an annualized basis. Most loans
are for 30 days or less and can be rolled over for additional finance charges. Loan amounts are usually
from $100 to $1,500.
What is a payday loan?
Answer: A payday loan is a short-term loan, generally for $500 or less, that is typically due on your next payday.
Payday loans generally have three features:

The loans are for small amounts.

The loans typically come due your next payday.

You must give lenders access to your checking account or write a check for the full balance in advance that the lender
has an option of depositing when the loan comes due.
Other loan features can vary. For example, payday loans are often structured to be paid off in one lump-sum payment, but
interest-only payments – "renewals" or “rollovers” – are not unusual. In some cases, payday loans may be structured so
that they are repayable in installments over a longer period of time.
Some ways that lenders might give you the loan funds include: providing cash or a check, loading the funds onto a
prepaid debit card, or electronically depositing the money into your checking account.
The cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday
loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. By comparison, APRs on
credit cards can range from about 12 percent to 30 percent.
State laws and other factors can influence how much you can borrow and the fees you are charged. Some states do not
have payday lending storefronts because these loans are not permitted by the state’s law, or because lenders may
choose not to do business in a state rather than abide by the states’ regulations.
There are special protections through the Military Lending Act for active duty servicemembers and their dependents who
use certain payday loans and other small dollar credit products.
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