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The 60 Second Expert Series: Payday Loans – Part 1

NOTE: We are introducing a new series on Credit Dusters Blog called, The 60 Second Expert. We are very excited as we are going to be bringing you a knowledge base of important information in a quick and easy format. We are always looking for feedback – please leave a comment below after reading the article as it will help us to continually improve.

Payday Loans – Part 1: The Nuts and Bolts of payday loans

What is a payday loan?

According to paydayloaninfo.org the definition of a Payday Loan is as follows:

Payday loans are short-term cash loans based on the borrower’s personal check held for future deposit or electronic access to the borrower’s bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.

Lenders hold the checks until the next payday when loans and the finance charge must be paid in one lump sum. To pay a loan, borrowers can redeem the check for cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period.

What is the “true” cost of a payday loan?

Under the Truth in Lending Act, the cost of payday loans – like other types of credit – must be disclosed. Among other information, you must receive, in writing, the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of credit on a yearly basis).

A cash advance loan secured by a personal check – such as a payday loan – is very expensive credit. Let’s say you write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115 in cash, or you roll-over the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.

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3 Responses

  1. […] creditdusters added an interesting post on The 60 Second Expert Series: Payday Loans – Part 1.Here’s a small excerpt:Payday loans are short-term cash loans based on the borrower’s personal check held for future deposit or electronic access to the borrower’s bank account. Borrowers write a personal check for the amount borrowed plus the finance charge … […]

  2. We borrowed a couple hundred from cashloancity.com and there was no problem paying back. It was there for exactly what we needed it for. What is the problem??

  3. Roy,

    Thank you for your comment – You used the Payday Loan for exactly what it was meant for and you used it in a responsible way. Many of my clients however, are not aware of the cost of doing this on a regular basis. It is not meant for cash flowing, but for a once-in-awhile crunch.

    Thanks Again and Post Anytime,

    Matt Sullivan,, CEO
    Credit Dusters, Inc.

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