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Payday Loan A payday
loan (also called a paycheck advance or payday advance) is a small,
short-term loan that is intended to cover a borrower's expenses until
his or her next payday. The loans are also sometimes referred to as cash
advances, though that term can also refer to cash provided against a
prearranged line of credit such as a credit card (see cash advance).
Legislation regarding payday loans varies widely between different
countries and, within the USA, between different states.
Some jurisdictions impose strict usury limits, limiting the nominal
annual percentage rate (APR) that any lender, including payday lenders,
can charge; some outlaw payday lending entirely; and some have very few
restrictions on payday lenders. Due to the extremely short-term nature
of payday loans, the difference between APR and effective annual rate
(EAR) can be substantial, because EAR takes compounding into account.
For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% =
390% but the EAR is 1.1526 - 1 × 100% = 3686%. Careful reporting of
whether EAR or APR is quoted is necessary to make meaningful
comparisons.
Retail lending
Borrowers visit a payday lending store and secure a small cash loan,
with payment due in full at the borrower's next paycheck (usually a two
week term). In the United States, finance charges on payday loans are
typically in the range of 15 to 30 percent of the amount for the
two-week period, which translates to rates ranging from 390 percent to
780 percent when expressed as an annual percentage rate (APR)[1] The
borrower writes a postdated check to the lender in the full amount of
the loan plus fees. On the maturity date, the borrower is expected to
return to the store to repay the loan in person. If the borrower doesn't
repay the loan in person, the lender may process the check traditionally
or through electronic withdrawal from the borrower's checking account.
If the account is short on funds to cover the check, the borrower may
now face a bounced check fee from their bank in addition to the costs of
the loan, and the loan may incur additional fees and/or an increased
interest rate as a result of the failure to pay. For customers who
cannot pay back the loan when due, members of the national trade
association are required to offer an extended payment plan at no
additional cost. In states like Washington, extended payment plans are
required by state law.
Payday lenders require the borrower to bring one or more recent pay
stubs to prove that they have a steady source of income. The borrower is
also required to provide recent bank statements.[citation needed]
Individual companies and franchises have their own underwriting
criteria.
Internet lending
Online payday loans are marketed through e-mail, online search, paid
ads, and referrals. Typically, a consumer fills out an online
application form or faxes a completed application that requests personal
information, bank account numbers, Social Security number and employer
information. Borrowers fax copies of a check, a recent bank statement,
and signed paperwork. The loan is direct-deposited into the consumer's
checking account and loan payment or the finance charge is
electronically withdrawn on the borrower's next payday.
Examples
For example, a borrower seeking a payday loan may 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.
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.
Federal regulation
In the US, although payday lending is primarily regulated at the state
level, the United States Congress passed a law in October 2006 becoming
effective on Oct. 1, 2007 that caps lending to military personnel at 36%
APR as defined by the Secretary of Defense. The Defense Department
called payday lending practices "predatory", and military officers cited
concerns that payday lending ruined low-paid enlisted men and women's
finances, jeopardized their security clearances, and even interfered
with deployment schedules to Iraq.
Some federal banking regulators and legislators seek to restrict or
prohibit the loans not just for military personnel, but for all
borrowers, because the high costs are viewed as a financial drain on the
working and lower-middle class populations who are the primary
borrowers.
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