Pay-day Loans

What is a pay-day loan?
If you avail a loan for a short tenure to manage your financial crunch between the pay-days it is called a pay-day loan. Since the loan is taken for a short term, no credit checks are conducted and are usually not against a prearranged line of credit.

Why is it called a pay-day loan?
The name is derived as the day of settlement or repayment of the loan coincides with the debitor’s subsequent pay-day. The amount is generally paid in cash; the borrower gives the creditor a post dated check that not only has the original loan amount but also includes the interest accumulated during this tenure. The check is either given to the bank for the conventional processing methods or the electronic withdrawal method is used to take the money from the borrower’s account.

Do banks or other financial institutions provide this service?
Pay day loans are usually provided by small franchises or finance companies. However, there are some large financial organizations also that offer this service. In some cases, banks also provide this facility; they offer “a direct deposit scheme” for those customers whose paychecks are deposited electronically into accounts that are held in such banks. When the customer applies for a direct deposit advance, the bank provides them with a small cash advance. When the debtor’s account receives the next deposit, the loan amount is automatically deducted along with an advance fee.

What rate of interest do I have to usually pay if I take such a loan?
It is evident that such short term loans will have a very high interest rate – typically the companies will charge you approximately $15 to $30 for every $100! A quick calculation will show that the Annual Percentage Rate turns out to be more than 391%! Oopps! That’s exorbitant!
Nevertheless, the processing costs of such loans are not very different from its counterparts like home loans, which have a much higher principle and are for a long tenure. Studies have shown that these short term loans are actually not very profitable in the long run. In fact it has been seen that the loan losses can average up to 15% or more of loan revenue. Moreover, there is always a risk of dealing with people providing fraudulent checks as security or making stop payments.
Companies providing pay day loans also reason that though the interest rate on such a loan looks outrageously high, it is actually much less considering the factors like a bounced check or late credit card payments. Bouncing a $100 check will attract an NSF fee of $28 and a returned check of $25 from the merchant.

So when should I opt for a pay day loan?
So, you see that pay day loans are not really an intelligent choice for either the borrower or the provider. So, restrict the availing of such loans for situations like some urgent expense – this might include some Medical Bills, House Rents, Electricity Bills or some other utility payments. It is advisable to follow a proper budget and also taking care of the finances – failing which you have to seek the help of these high interest pay-day loans.

Let me give you a few tips that you must keep in mind if you are applying for a pay-day loan:

• Don’t opt for it unless it is an absolute necessity. As discussed earlier they attract a huge rate of interest and should be avoided.

• Do some research before availing for a pay day loan. Look for a company that is charging you with a low APR.

• Ensure that the documents you are providing for processing the loan is in safe hands. If you see that the company is doing the procedure in an encrypted page, you can be assured that the information will not be leaked out.

• It is highly recommended that you should look for lower cost credit; by comparing both the dollar finance charge and the APR, select the one that gives the lower credit.

• Finally and most importantly, read the company’s policies and legal matters before signing the application form

Loans on the net
With the advent of the internet, pay day loans via the emails, online searches, paid advertisements and referrals are becoming increasingly popular. The requestor is expected to fill up an online application form and then the same along with the documents like personal information, checks, recent bank statements, Social Security Number and the relevant papers are faxed to the loan provider. The amount is then directly deposited in the borrower’s account and the charges are electronically withdrawn on the borrower’s next pay day.

However, the CFA or the Consumer Federation of America warns the consumers to be extremely careful while using the internet pay day loan sites. It has been seen that most of these online companies charge an annual interest rate of 650%. Moreover, there is also a very high risk when you are exchanging personal and financial information over the net.

Moreover, the contracts provided by the online payday lenders have a lot of one-sided terms that include mandatory arbitration clauses, a contract that the borrower should not participate in class action lawsuits and agreements not to file for bankruptcy. Some lenders even go to the extent of asking their borrowers to keep their bank accounts open until the entire repayment is complete. Some even ask for “voluntary” wage assignments even in states where wage assignments are not legal.

Payday loans are a form of specialized lending not typically found in state non-member institutions, and are most frequently originated by specialized non-banking firms subject to state regulation. These loans have a high element of risk as it involves a large volume of loans, handling of personal and financial documents and the movement of loan funds between the institution and any third party originators. Furthermore, since most of these loans are underwritten off-site, there is a possibility that the terms and conditions may be misrepresented by the agents or the employees.