A payday loan is a small, short-term unsecured loan, “regardless of whether repayment of loans is linked to a borrower’s 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. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries, and in federal systems, between different states or provinces.
What is payday loan?
A payday loan is a short term borrowing wherein an individual borrows a small amount at a very high interest rate. The borrower writes a post-dated personal check for the amount they borrow in addition with the fee they exchange for cash. The lender holds on to the check and cashes it on the agreed date. These loans are also known as cash advance loans or check advance loans.
The concept of payday loans originated as short term loans that matured once you received your wages. However, today’s definition of payday loans is simply any short term, unsecured loan. These loans are best used to cover temporary cash setbacks.
Breaking down Payday loan
Though the federal truth in lending act requires payday lenders to disclose their financial charges, these establishments have earned a bad reputation for their lending practices. Many of the borrowers using payday loans have a low income or a bad credit. They may probably have no access to credit cards and are forced to use the payday loan services. Most loans are for 30 days or less and can be rolled over for additional finance charges.
Every unpaid loan involves a check that is not covered by funds on deposit in the borrower’s bank account. Returned checks on the other hand cause negative credit ratings on credit reports and specialized database. A consumer can probably lose his bank account or have difficulty in opening a new account if he develops a history of bouncing checks used to get payday loans. The key difference from other types of loans and payday loans are that payback loans tend to last for a short period, usually for about one or two weeks. They need to be repaid upon you getting the next salary or income. Due to the short length there would be a higher fee and interest for a small credit limit.
Internet payday lending is the new trend in the market. They add security and fraud risks to payday loans. Consumers can apply online or through faxed application forms. Loans are directly deposited into the borrower’s bank account and electronically withdrawn on the next pay date. Many internet payday loans are structured to automatically renew every payday, with a finance charge electronically withdrawn from the borrower’s bank account.
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