In United States, ads in radio, television, newspaper, internet and hoardings all refer to payday loans. These loans may be handy but they come at a very high cost due to interest charges. These loans are known in various names like payday loan, check advance loan, post dated check loans, deferred deposit check loans. But their purpose are more or less same i.e. to offer small, short term, high rate loans.
The procedure in a nutshell, the borrower writes a check payable to the lender for an amount equal to the borrowing amount plus the fees. The company or lender pays the borrower the amount minus the fees against the check received and the fees are a percentage of the principal amount of loan taken.
Cash advance loan taken by giving a post-dated personal check is an expensive credit option. As an example, someone interested to borrow (say) $100 . He will have to pay the interest of (say) 15% for 14 days of loan period. That means he will have to write a post-dated check of $115 for getting the loan of $100. Once the stipulated period of 14 days expire, the lender will then cash the check and the borrower must ensure that the money is made available in the bank account or he will have to pay the cash.
However, if the borrower desires to extend the period, he may roll over the check by paying the fees or interest for another term of 14 days and so on. This way the interest or fees will mount in arithmetical progression. That means this payday loans suits to those who will be meticulous in repayment in scheduled time and borrow for exigencies only. One should remember and understand, as per the Truth and Lending Act, the lending Company must disclose the cost of the payday loans. The borrower must get in writing all the information about finance charges and annual percentage rate (APR).
Payday loans are widely discussed amongst salaried people and others, for its advantages and disadvantages. There are debates between the consumer group and financial companies especially lending companies. The former clamoring that the system is draining money from poor and enriching the powerful and rich while the latter affirmed that it is the ultimate in lending for customer's convenience.
Therefore, the question is whether the pay day loan is good or bad. If we look into the positive side, it is the only easily and quickly small loan available for immediate and sudden needs although the rate of interest is high The Banks have no interest to cater to this segment at all. The personal loan facility that they offer is extremely cumbersome and time taking. The procedures sometime bordering to humiliation and the period of waiting is so much that the very purpose or intent of the loan is lost.
There are other aspects also which favors payday loan over others. A credit card deadline or check bounce prospects will amount to more overall financial losses. Further, by avoiding a bad credit report will keep your records clean for future bigger loan facilities from the bank. So, even apparent one time extra interest payment in payday loan is beneficial comparatively.
In the disadvantage side, the rate of interest is one on the higher side. It may be lower than credit card, but typical loan interests are much lower than payday loan. There are community loan, credit unions etc. which gives loan at a much cheaper rate. Payday loan customers are mostly uninformed citizens who are not aware of such facilities and gets easily impressed by the attractive ads of the lending companies.
Another disadvantage of the payday loan is, there are many one sided terms in the contract like automatic loan renewal on payday , hidden fees, high rate of interest for late payment etc. which are tactfully hidden in words in the contract . Some lending companies do not reveal their interest rates, which is illegal and forbidden by law. So, the borrower in proper assessment of contract clauses before finalizing the transaction should exercise extreme caution.