I am sure you have seen numerous internet sites or driven by businesses that are advertising quick cash in flashing gold and red lights. If you know what I am talking about than you have encountered a payday loan service. A payday loan is also known as a paycheck/payday advance. The loan is short term and carries large interest rates. Many states have outlawed the practice of these cash advance loans due to the nominal annual percentage rate (APR) and the effective annual rate (EAR).
For example, if you are seeking a payday loan you can write a post-dated personal check for $460 to borrow $400 for up to 14 days. The payday lender agrees to hold the check until the borrower's next payday. At that time, the borrower has the option to redeem the check by paying $460 in cash, or renew the loan (a.k.a. "flip the loan") by paying off the $460 and then immediately taking an additional loan of $400, in effect extending the loan for another two weeks. In many states, "flipping" or "rolling over" the loan is not allowed. In states where there is an extended payment plan, the borrower could choose to opt into a payment plan. If the borrower does not pay off or refinance the loan, the lender deposits the check. In this example, the cost of the initial loan is a $60 finance charge, or 390% APR. (Wikipedia)
When the Consumer Federation of America conducted a survey of 100 internet payday loan sites, it found loans from $200 to $2,500 were available, with $500 the most frequently offered. Finance charges ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in two weeks. (Wikipedia)
The interest rates easily spiral out of control causing your debt to sky rocket and borrow more money. Payday loans services want you to be financially locked into them so they can keep making money. Many states have already outlawed the practice due to the monopolizing debt it can rack up on individuals. Many other states that allow the practice of payday loans have started applying rules to the amount of loans that an individual can take out.
Many states have outlawed the practice of these loans but that does not mean you cannot obtain a loan from another state. Wherever the loan was issued is the state where the loan rules will be applied. Exercise all other options before obtaining a payday loan and make sure the company is credible and legal.
No matter what name you give your cash advance you need to be smart with your money. If you feel that this is your only option read the fine print. Understand what the worse cases scenario would be with your loan and how to avoid it. Remember that many states are outlawing the practice of payday loans so that should be an immediate red flag for you to exercise a more credible resource. It is your money and you worked for it, be financially smart in whatever decision you make.
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