Explanation of Pay day Loans

Payday loans, also called deferred presentment, cash advance or check advance loans, are short term loans usually at a high interest rate that become due on the borrower’s next payday. Before getting the funds, the borrower writes a check for the amount of the loan, plus the company’s lending fee. The company then gives the bor­rower cash in the amount of the check, minus the fee.  For example with a $350 payday loan, a borrower pays an average fee of about $60 and gets $290 in cash.  This amounts to an annual percentage rate of more than 390%. 

The lender does not attempt to collect on the check until the borrower’s next payday, at which time the loan is due in full.  However, most borrowers cannot afford to pay the loan, so they pay another $60 to maintain the same loan or they pay the $350 back, but immediately take out another payday loan with another $60 fee.

Under either scenario, the borrower never pays down the original amount of the principal and thus becomes stuck in a debt trap, paying new fees every two weeks just to keep an existing loan outstanding.