What Is a Payday Loan? A payday loan is a type of short-term borrowing where a lender will extend high-interest credit based on your income. Its principal is typically a portion of your next paycheck. Payday loans charge high-interest rates for short-term, immediate credit. They are also called cash advance loans or check advance loans.
How Do Payday Loans Work?
Payday loan providers will normally require you to show proof of your income—usually your pay stubs from your employer. They will then lend you a portion of the money that you will be paid. You will have to pay the loan back within a short time, generally 30 days or less.
How Do I Get a Payday Loan?
Payday loan providers are typically small credit merchants with physical stores that allow on-site credit applications and approval. Some payday loan services also may be available through online lenders.
What Are Payday Loan Interest Rates?
Payday lenders charge very high levels of interest: as much as 780% in annual percentage rate (APR), with an average loan running at nearly 400%. Most states have usury laws that limit interest charges to anywhere from 5% to 30%. However, payday lenders fall under exemptions that allow for their high interest.
Are Payday Loans Legal?
The rules included a mandatory underwriting provision requiring lenders to assess a borrower’s ability to repay a loan and still meet everyday living expenses before the loan is made. The rules also required lenders to provide written notice before trying to collect from a borrower’s bank account and further required that after two unsuccessful attempts to debit an account, the lender could not try again without the permission of the borrower.