Liza Lambert

Payday loans can be defined in two different ways. Payday loans are considered a similar term for cash advances or paycheck advance. The second definition thus rates payday loans as small, short-term loans (typically up to $1,500) that doesn't require a credit check and is intended to bridge the financial gap, which occurs sometimes between the pay day of the previous month and the current month.

Payday loans are typically given out in cash. As a mode of security, a post-dated check is issued by the borrower to the lender. The check includes a figure which is a total of the original loan principal and an accrued interest and bears a date that coincides with the borrower's next pay day. The check is cashed by the lender either traditionally or through electronic systems from the borrower's bank account.

Lenders of payday loans usually operate from small stores or franchises; the recent times have also seen the large financial service providers offering payday loans under different terminologies. While some of the well-known financial institutions offer payday loans in the form of direct deposits, others keep it plain following the standard payday loan rules. However, direct deposits relieve the burden of writing checks and are meant only for people who receive their monthly payments electronically. But in the United States, where most of the states have their own usury laws, forces the payday loan lenders keep the interest rates within a certain limit. Thus, the lenders fund payday loans through banks chartered in a different state.

Payday loans are a form of sub-prime lending. Though the amounts and the interests seem lesser than high interest rate credit cards, it has been able to raise bigger controversies than the credit card. While some claim that payday loans are targeted exclusively to the young, the low-income communities and everyone who doesn't understand the time-value of money, others rate payday loan lenders as loan sharks, the high interest rates (250% or more when annualized) being the reason.

Though lenders of payday loans argue that the charged interests are less than what the credit cards charge, it has been proven that every $100 payday loans with a $15 fee is equivalent to a 391% of annual percentage rate; if the check issued against the $100 bounces back, the penalties equal to a 1,251% of annual percentage rate of a normal credit card.

Summary

Therefore, payday loans, being a form of loan with very high interest rates, is always better to avoid, especially for someone who is aware of the time-value of money. Even if situations demand for taking out a payday loan under some emergency, care should be taken that it does not become a habit. It is always better to consider the alternatives before opting for payday loans, another reason being the rollover that may double both the initial payment amount.