Payday loans (also known as cash advance loans) are short-term, high-interest loans used to generate immediate cash between wage payments. The customer presents photo identification and proof of income, usually previous pay stubs. He or she may write a post-dated personal check to the lender which includes the amount of the cash desired and an established fee. The lender then presents legal documentation which describes the exact terms of the loan, including annual interest rates, late fees and finance charges. Upon signing these documents, the customer receives cash. Ideally, the entire loan is paid in full whenever the customer's next paycheck is issued. If not, the loan terms may be extended or 'rolled over'.
Many financial experts strongly discourage the practice of payday loans. Because the loans are very short-term, their APR (annual percentage rate) can reach upwards of 500%. If the entire amount owed is paid by the date of the personal check, payday loans are merely expensive but affordable sources of emergency cash. But if the customer is unable to pay off the entire loan with his or her paycheck, the outstanding balance incurs late charges and additional interest fees. If payday loans roll over three times, the accrued interest can equal or surpass the original amount of the cash advance. Many states do not have laws which regulate the interest rates a private cash loan institution can charge.
While the terms and conditions of payday loans may seem draconian, there may be extenuating circumstances which make emergency cash advances attractive. Many consumers literally live from paycheck to paycheck, which means any unexpected expense can cause financial disaster. The only acceptable payment solution may be a substantial amount of cash. Financial advisers suggest that consumers try to find alternatives to payday loans whenever possible, such as extended repayment agreements with the creditor or a promissory note held until the funds are available through normal wages. If a cash advance loan option seems unavoidable, only borrow an amount of cash which can be repaid entirely with the next paycheck.
Payday loans should only be considered in cases of extreme financial emergency. Be sure to read the terms and conditions of the loan carefully before signing any agreements. Lenders will pursue all legal options available if the personal check is returned for insufficient funds. These private lending institutions profit from roll over interest payments, so resist the temptation to borrow more cash than you can safely repay through wages.