Understanding How Cash Advance Payday Loans Work

Yara Zakharia, Esq.

Positioning itself as an alternative to traditional consumer loan products, payday lending has succeeded in filling a niche in the consumer finance market. It is witnessing unprecedented growth throughout the United States, evidenced by the fact that at least seven of the nation's payday advance loan powerhouses currently have publicly-traded shares. Moreover, conventional lenders (i.e. banks) are partnering with companies that provide pay day advances. Borrowers represent a cross-section of the population and include consumers that have maintained a long-term relationship with a financial institution. They are, for the most part, in need of an emergency cash buffer in an amount ranging from $100-$700. Payday loans are a monetary security blanket for Americans living paycheck-to-paycheck and who cannot afford to wait or to be subjected to a credit check and lengthy application process.

Payday cash advances are a cost-effective way of addressing unforeseen short-term cash deficiencies, and they can be obtained either in person or online. Applicants usually request these loans in the range of $100-$500, with repayment generally due in full on their following payday or within two weeks. The payday advance loan application is convenient and self-explanatory. To qualify for such a loan, borrowers must typically satisfy the following requirements:

1. Be 18 years of age;

2. Have a steady source of income (from government benefits such as social security or from a job)

3. Earn a minimum $1000 per month

4. Possess an account with direct deposit or a checking account

5. Present personal identification

Some providers have additional requirements, such as pay stubs and bank statements to prove regular employment. Online payday loan companies rarely request that their customers provide written confirmation of the information submitted. Furthermore, consumers can avail themselves of an encrypted (secure) and confidential online application, which has further expedited and simplified the process of loan approval. Individuals confronted with any type of credit issue such as bounced checks or bankruptcy are eligible for online payday loans. Processing of the online payday advance, in particular, occurs in two minutes or less, and approval status is communicated in a matter of minutes. Lenders will generally transfer the funds into the borrower's account on the same day.

On the maturity date, the customer pays a finance charge that corresponds to the amount he or she borrowed. The amount of interest imposed will also vary from one state to the next. Finance fees on payday cash advances of $100 are usually in the range of $15 to $30, or 390 to 780 annual percentage rate (APR), respectively. Payday advance loan businesses offer flexible repayment options. Borrowers may choose from three payment options:

1. Pay solely the interest and finance fees;

2. Pay a portion of the interest and principal on the due date; or

3. Pay the entire loan in full

Consumers may undertake to repay their loan in person. If they fail to do so, the lender electronically withdraws the funds from their checking account. Payday loan default occurs when the borrower's bank account is short on money to cover the check, in which case, the company may charge a 'returned check fee'. This is in addition to the non-sufficient funds (NSF) fees charged by the customer's banking institution. To avoid such fees and further payday loan debt, consumers should timely repay the amount owed. The customer is also given the option of "rolling over" or renewing the loan by asking the lender to extend due date for another two weeks. The borrower will incur additional extension and interest fees.