Payday loans also known as cash advance or payday advance is a form of short term loan which is secured against someone’s next pay check. These payday legislations will vary widely in different countries. The lender will provide a short term unsecured loan which will be repaid at the next pay day. Some employment and income verification will be involved through bank statements and stubs will be paid, though this can be omitted. Companies and franchises have a customized underwriting procedure.
Loan in form of small cash is secured from a payday lending office, and will be deducted in full on the next pay check of the borrower. The borrower writes a post dated check to the lender, indicating the loan fees and the full amount of money he wants to borrow. Immediately the date matures, the borrower will go back to the loan office so that he repays the borrowed money in person. If the borrower does not pay in person, the lender can redeem the check. If the account does not have enough money to cover the borrowers check, then the borrower will have a bounced check fee from the bank that will add up to other charges of the loan. Interest fee will therefore rise since the borrower has failed to pay the loan on time.
Due to the advancement of technology, payday has been made more convenient and easy, in that borrowers are able to do it online. A borrower will complete the loan application online and send it via fax when documentation is needed. When the borrower is using direct deposit, the money borrowed will then be transferred to his account, and the fees for repaying loan will be automatically deducted from his next pay. Most lenders do not verify income when borrowers use payday online transaction.
Yes, there are jurisdictions that will limit the annual percentage rate pay lenders can charge to borrowers. This prevents usury, meaning unreasonable and excessive rates of interests. Some jurisdictions can entirely outlaw payday lending services. Over the years, payday loans have faced criticisms by being a practice that is controversial, facing legal battles and social challenges. Here are some of the reasons:
Most borrowers are young, poor and have low incomes and don’t understand that high rates will trap them into debt cycles. By renewing the loan repeatedly and pay their loan fees every two weeks, increases the interest fee and this is the time they can save much to pay the principal and the debt. This is not the case for the middle class since they pay 25% of their interest rates using credit card purchases unlike the poor.
Higher loan fees are charged than they are allowed by the law. They ignore usury limits which control unreasonable and excessive rates. These are usually higher than other banks and will not encourage any saving and asset accumulation, these ending up in depleting the assets of all low income earners.
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk