Payday loans are short-term loans generally issued for small amounts at high rates of interest. The term "payday" refers to the idea that the loans are intended to help someone pay basic expenses for the short time before they receive a paycheck. Most payday loan businesses are legal, although some are scams.
Features
According to the Consumer Federation of America, most payday lenders require that borrowers secure their loan by leaving a check make out to the lender for the amount of the loan plus any designated fees. The lender agrees to cash the check on a certain day. The lender may also be given access to the borrower's bank account, with a similar agreement to withdraw money on an agreed-upon date.
Regulation
Payday loans are heavily regulated by each state. Many states set maximum rates of interest that payday lenders can charge, as well as maximum amounts that they are allowed to loan out. Loans generally range in size from $100 to $1,000 and are assessed annual interest rates of approximately 400 percent annual interest, although the finance charges assessed for short-term loans are equivalent to an even higher rate.
Considerations
If a payday loan operation operates according to the laws of its state, meaning that it charges under the maximum rate of interest and lends out less than the maximum amount of money, it is technically legal. However, this does not mean that the rates charged by payday lenders are not far higher than those charged by most banks, credit unions and credit card companies.
Evasions
According the Consumer Federation of America, many payday lenders use a variety of schemes to evade state regulation. For example, most lenders in Texas classify themselves as "credit services organizations," which means they don't have to follow the state's payday loan laws. In Illinois and New Mexico, lenders charge expensive installment loans instead of single-payment loans to avoid regulation, and in Virginia, some payday lenders turn their one-time loans into lines of credit for the same reason.
Solution
Consumers are better off taking out a loan from a number of other sources, including a credit union, a small loan company, their employer (in the form of an advance) and friends or family in lieu of taking out a loan from payday lenders. Generally, the rates charged by these people are far lower than those charged by payday lenders.
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