Deferred deposit loans, commonly known as payday loans (also called cash advance loans, check advance loans and post-dated check loans), have become an increasingly popular method for consumers to access fast cash.
How it works
Bad credit? No credit? Not a problem. All a consumer needs to obtain a payday loan is a job, a phone, a utility bill, a checking account, and a driver s license. The borrower writes a personal check payable to the lender for the amount he wishes to borrow, plus a fee typically 10% to 25% of the check. The check is held for one to four weeks, usually until the customer s next payday, at which time he either redeems the check by paying the face amount, or allows the check to be cashed. If the borrower can t afford to cover the check, he may roll it over for another term by writing another check, which will result in another set of fees being added to the balance.
Consumers may be mislead into thinking that payday loans are a cheap and convenient way of borrowing money for the short term. However, with average annual interest rates ranging from 390% to 871%, payday loans are no bargain. Consider this example:
Paying a $30 fee on a $200 loan with a 2 week repayment period translates to an APR of 390%. Compare the costs to other types of credit:
To Borrow $200 and Repay in One Month