The Center For Debt Management
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Payday Loans
Short-Term, Unsecured Loans

Payday loans are small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment. Payday loans are usually priced at a fixed-dollar fee, which represents the finance charge to the borrower.

How Payday Loans Work

In return for the small loan—usually less than $500—the borrower provides the lender with a check or debit authorization for the amount of the loan plus the finance charge. The lender agrees to defer presentment of the check until the customer's next payday. At the next payday, the customer may redeem the check by paying the loan amount plus the finance charge, or the lender may cash the check. In some cases, the borrower may extend the loan by paying only the finance charge and writing a new check.

Who Are the Borrowers?

Typically, payday lpan customers have cash flow difficulties and few, if any, lower-cost borrowing alternatives. Payday customers tend to be frequent users of payday advances, often choosing to roll over their credits or to obtain additional extensions of credit. Therefore the cash flow difficulties experienced by many payday customers are a long-term credit characteristic as opposed to a short-term temporary hardship.

Payday customers often rely on payday loans because they have either been turned down for other forms of credit or offered less credit than the amount for which they had applied.

Internet Payday Lending

Today, many consumers use the Internet to select a payday loan lender. Typically, a consumer fills out an online application form
or faxes a completed application that request the borrower's personal information, bank account numbers, social security number and employer information.

The borrower will then fax back to the lender copies of a check, a recent bank statement, and signed paperwork. The loan is then direct-deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday.

Example

A borrower seeking a payday loan writes a post-dated personal check for $460 to borrow $400 for up to 14 days. The payday lender agrees to hold the check until the borrower's next payday. At that time, the borrower has the option to redeem the check by paying $460 in cash, or renew the loan (a.k.a. "flip the loan") by paying off the $460 and then immediately taking an additional loan of $400, in effect extending the loan for another two weeks. In many states, "flipping" or "rolling over" the loan is not allowed. In states where there is an extended payment plan, the borrower could choose to opt into a payment plan. If the borrower does not pay off or refinance the loan, the lender deposits the check.

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