A small temporary loan taken to bridge the borrower's cash flow gap between paydays, is referred to as a payday loan. They are unsecured, high-interest short-term micro loans. These loans are usually arranged in cash, and the lender processes the check or takes out from the borrower's checking account on the date of maturity.
The process:
Many states in the U.S have usury laws that prohibit interest rates if they exceed the annual percentage rates. For example if you need a payday loan, you would have to write a post dated check for $315 to borrow $300 for a period of two weeks; the extra amount being the finance charge, and the lender will give you his assurance to wait till the next payday. If you fail to repay, then the lender can deposit the check of $315. In most of the states the rollovers are forbidden, as the financial charge goes on increasing. In the U.S. this payday check has been prohibited in thirteen states.
Lenders:
Quite often these payday lenders are criticized. They are called the merciless loan sharks attacking the poorer section, low income areas, who are unable to comprehend the time value of money. Many people find the interest rate on the payday loan puts the weaker section in difficulties, where the richer community can afford to pay even up to 25% interest or so on their credit cards.
You have to be extremely careful if you are planning to take a payday loan. Sometimes after writing a check of $350 in exchange for $300 in cash, things might come up and you might not be able to pay back the money within the allotted two weeks limit, thus the roll over loan will start and you may end up paying as high as $500, and may still need to pay the original $300 amount! It has been recorded that some borrowers have even been charged as high as 1800% interest on a very small loan. The authorities are now trying to track down these loan sharks who are charging around 700% interest rates.
According to a research survey it has been recorded that after deducting the fixed operating cost and the default losses, the payday loans company does not make much profit. There have been cases of fake checks presented by borrowers as security, and as a result, the check bounces.
Payday loans can save you:
Had it been possible to know or predict financial emergencies, then payday loans would not have happened! Many a time you may find yourself caught in unexpected situations and you may not be well equipped to deal with the situation. Like when you fall ill, or your car breaks down, you would have to bear on your planning budget for the month. So for these kinds of situations, payday loans are of great help as you can get instant cash. You can even apply for it online, and the money gets deposited into your account directly.
It's simply not humanly possible to plan for every penny and every move life makes. If you're on a shoestring budget, then you're aware of the danger of unexpected costs.
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