How does a payday loan work?
A Payday loan is a short term loans that is based on the gross income of the borrower held as security for the future electronic access to the account of the borrower. A personal check is signed by the borrower for the cash borrowed including the receive cash and the finance charge. In several cases, the borrowers also give the lender the electronic access to the lender, of their account for the repayment of the loan.
Lenders keep the check as security till the next payment day on which the finance charge and loan is to be repaid as a single amount. The borrowers can redeem, to pay the loan, the check by paying the credit in cash form. In such cases the check is deposited bank in the bank while the finance charge is paid only. The borrower extends the loan for another period with added interest. There are long term payday loans as well, in which the loan is repaid in instalments and the lender is requested to electronically withdraw only a small amount each week/month from the account of the borrower.
A Payday loan range from $300 to $1,000, depending on the state and its defined maximums. The average term of the loan is minimum two weeks and maximum a month. The cost of an average loan is usually 400% ARP (annual interest rate). Typically, the finance charges vary from $15 to $30 for every $100. In many states, the interest rate is restricted to $15-25 because the amount that could legally be borrowed is less than $350. But in other states, the shorter the loan term, the higher the APRs.
Payday loan requirements
Payday loans have an eligibility criteria. The borrower must have an open bank account that was opened at least 6 months before the loan application and has been credited with a regular flow of income. The borrower must prove that he has a regularly coming income and is just on a bad credit. The lender may ask questions about the monthly expenditure. As the payday loans are based on the ability of the lender to credit the amount than the ability of the borrower to repay. Therefore lenders ensure that the borrower is able to meet the financial obligations. According to a recent survey, 80% of the borrowers tracked within 10 months with payday loans were on bad default.
Payday loans are established by payday stores, or other stores that give financial services, like title loans, cashing, pawn and rent-to-own type services. These services depend on the licensing requirements the state. Many loans are also made through mobile devices and websites. In the year 2015, more than 15,766 payday loan stores were found operating through websites.
Legal Payday status for lending
If you are applying for a high amount of payday loan, you must seek the state's authorized laws. More than fifteen states protect the borrowers from applying for a higher cost of payday loan, and have established a rate cap for small loans. Three states have long term and lower cap rate loans established to ensure borrowers do not apply for expensive loans. Online payday lenders are mostly subject to the rate cap and licensing laws of the state where the person apply for the loan.
Payday loans are prohibited for the service members as well as their dependents. The Department of the defense law applies to the mortgages that are subject to Lending Act, which includes title and payday loans. Lenders are restricted to charge more than 36% of the annual interest which includes a check, fees, car title debit authorization and mandatory arbitration clauses in covered loans.
Although the payday loan laws differ from state to state, there are three basic group of laws.
In 28 states, a payday loan is restricted by the law to remain under $1,000 with a maximum interest of $15 on every $100 borrowed. In such loans, the lender is allowed to demand full payment on the payday. Such states however have some more limits. They also limit the minimum amount of income a borrower should have to be eligible for the loan. Active duty army service officers cannot apply for payday loans.
In around 15 states, including Washington DC there is no official way of applying for a payday loan. Majority of these states have declared these loans to be illegal. Only a few of the restrictive states work under the 36% APR, and that too through online services. Borrowers will have to find an online service if in that state.
The rest of the eight states have mediocre regulations. Some of the lenders charge low while some charge as high as 260% APR. Many other lenders have limited the amount of the total income a borrower makes in a year. Furthermore, these states do not even provide loans longer than two weeks.
A payday loan is only suitable if you have a running income that is enough to cover your monthly expenditure as well as the interest based amount that you have to repay. Unless, it is better to opt for a longer period of loan.
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