A payday loan is a loan in which a lender gives the borrower a loan, typically under $500, that is due on the borrower's next payday.
Why It's Important
In my opinion, payday loans are a type of predatory lending. They typically have high-interest rates and or fees. These loans are extremely short term (ranging from 1 week to 4 weeks before the balance is due). Most states have limitations on how much creditors can charge in fees. These fees typically range between $10-$30 for every $100 borrowed. Even at the low end, these fees are expensive. Let's look at the numbers. If we had a $15 fee per $100 borrowed, that would equate to an APR of about 400%. It may not seem like the fees are a lot, but they do add up quickly!
Another disheartening point about payday loans is that the borrower is typically stuck in the cycle once they get in. The lenders generally do not check the affordability of the loan. In other words, they don't care if you don't have the means to cover your obligation. It is hard to dig out of the debt with interest rates so high, especially if the borrower gets in the habit of rolling over or renewing the loans. Fortunately, many states regulate or even prohibit these types of loans.
Have you ever used a payday loan? What was your experience and outcome?
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