What is a payday loan?

You’ve seen the signs (typically around military bases) and heard the ads on TV. Easy cash when you need it. A payday loan - but what is it?

A payday loan is a short-term loan designed to provide cash between paychecks. The reality is often quite different. The mechanism puts a deposit in your checking account for the amount of the loan minus some ‘fees’ and is repaid by direct debit of your checking account when the loan is due. The loans are typically easily renewed and often carry high interest rates because, as the industry claims, the risk of default is high. i have personally seen Annual Percentage Rates as high a 1,575%. While some states have attempted to regulate or outlaw them, a payday loan is only a click away on the internet.

The FDIC and the FTC have published articles on the costs of such easy credit and there talk on political circles about real reulation. However, at this point there is no Federal regulation of payday lenders. The industry has begun forming trade organizations and is promoting ‘responsible lending‘. The Consumer Federation of America has published an excellent series of webpages to explain the risks of payday lending and the regulation in your state.