Uses and Dangers of Payday Loans

By Anita Johnston,
LendersMark.org Staff Writer

Payday loans are also popularly known as a paycheck advance, but more often cash advance, this term is also applied to a financial operation where cash is provided against a prearranged line of credit. Payday loans are given in cash and secured by a borrower's post-dated check that includes the original loan principal and accrued interest up to the due date.

The reason why these loans are called cash advance is that the maturity date generally coincides with the borrower's next payday, when the lender can process the check. Some payloads are granted with an arrangement to make an electronic withdrawal from the borrower's checking account on the maturity day.

A large number of states in the United States have usury laws forbidding interest rates that exceed a certain APR limit. Lenders operating in these states fund the granted loans through the service of banks chartered in a different state, as this is allowed under the legal doctrine of rate exportation.

Usury laws were established by Marquette Nat. Bank vs. First of Omaha Corporation. The Law states that any loan is governed by the laws of the state where a bank is chartered in. This is useful for payday lenders, because a majority of them operate small stores or franchises, although there are a large number of financial institutions that also offer their own version of payday loans.

Some companies, particularly those income tax related, offer "refund anticipation loans" for tax fillers, and banks have a payday loan model called "direct deposit advance" for those customers whose paychecks are deposited electronically. This type of loan offers to consumers a predetermined, amount of cash advance, applying a fee between 10 to 20% of the loan.

Widely promoted as the fastest way to obtain cash, payday loans are costly in comparison to regular loans. Although, many people pay the price because in many cases there are no documents to fax and the approval is almost instantly, and even faster throughout the Internet because of it is granted via electronic deposit.

The amount of money that you can ask for varies from lender to lender, however not exceeding the $1,500 because this is just an unsecured, short-term cash advance until your payday to cover unexpected expenses, avoiding the high costs of bounced-check fees, which usually carry late payment penalties.

A payday loan can be received in cash, check, wired to your bank, or when it comes to electronic bank deposit to either your checking or savings account, and people can apply for a payday loan as many times as they need an immediate or urgent amount of cash. Payday loans are short-terms loans that must not however be used repeatedly from payday to payday.

Although you can apply over and over, a repeated payday loan may lead you to serious financial difficulties, hitting with 650% APRs over time. Jean Ann Fox, CFA's director of consumer protection said, "Internet payday loans cost up to $30 per $100 borrowed and must be repaid or refinanced by the borrower's next payday”.

When the payday is in 2 weeks, a typical $500 loan may cost you $150, so $650 will be electronically withdrawn from your checking account on the payday. Although the application forms online requests personal information, Social Security Numbers, bank account numbers, and employer information, there is no need to fax documentation.

The apparent benefit may become a headache. "Internet payday loans are dangerous for cash-strapped consumers. They combine the high costs and collection risks of check-based payday loans with security risks of sending bank account numbers and Social Security Numbers over web links to unknown lenders." according to Ms Fox's experience based on a survey led by the Consumers Federation of America, (CFA)