Payday loans also known as payday advances, short term loans and cash advance loans are small short term unsecured loans. These loans are also referred to as cash advances however this term can be confused with a line of credit such as those with credit cards. Payday loans rely solely on the borrower having employment and can provide proof of income such as check stubs. The legislation regarding these types of loans varies widely from country to country.
In order to prevent high rates of interest many jurisdictions have placed limits on the APR or annual percentage rate that any lender especially payday lenders can charge.
There are several ways that the APR can be calculated on these types of loans. Depending on the method that is used the rate can differ dramatically. For example for a £15 charge for a £100 payday loan lasting 14 days the APR could be anywhere from 400% to 500%
Some lenders have stated that payday loans can carry significant risk for them, however, it has been recently proven that there is no more risk with these types of loans than any other type or credit.
There is a process involved with payday loans where the lender provides a short term unsecured loan that the borrower has to repay on their next payday. Usually the borrower’s employment or their main source of income must be verified, however,some sources have state that some lenders don’t run credit checks or verify income.
There are two ways to apply for a payday loan either visit the lenders retail location or apply online. When a borrower visits the retail location they must provide a postdated check that the lender can cash for the amount of the loan plus fees in the event the borrower defaults on the loan. For borrowers that wish to apply online the process is similar except the application and other documentation such as proof of income, bank statement or voided checks must either be emailed or faxed to the lender. Upon approval the funds are direct deposited into the borrowers primary checking account. When the due date approaches (which is usually the next payday) the payment plus any finance charges are electronically withdrawn from the borrowers checking account.
Under the right circumstances payday loans can be very useful and many times have been a relief when an emergency occurs such as car repairs or even an emergency medical bill. But be careful since these quick loans do have what some consider high rates of interest. These are best used for those situations where you know you can pay them back quickly.