What is Payday Loan ?

Pay-day loan is a small short-term loan that is intended to manage the borrowers’ cash-flow gaps between pay-days. These are generally done without credit checks and are generally not against a prearranged line of credit. The maturity date usually coincides with the borrower's next payday – hence the name. The loan is typically given in cash and secured by the borrowers’ post-dated check that includes the original loan principal and accrued interest. On the maturity date the lender processes the check traditionally or through electronic withdrawal from the borrowers’ checking account if the borrower does not first repay or service the loan in person.

Payday lenders typically operate from small stores or franchises; however, some large financial service providers also offer variations of the payday advance. Some mainstream banks offer a "direct deposit advance" for customers whose paychecks are deposited electronically into accounts that are held in such banks. When a consumer requests the direct deposit advance they receive a predetermined, small cash advance.On the next direct deposit into the consumer's bank account that advance amount is removed by the bank plus a fee for the advance.The cost of pay-day loans are generally very high. Usually pay-day loan companies charge approximately 15 -30 USD per $100 borrowed. The APR (Annual Percentage Rate) works out to more than 391% - which is exorbitant by any standards. However, payday loan processing costs do not differ much from their higher-principal, longer-term counterparts such as home mortgages.

It has been noted that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable at all for this business line. Researchers have indicated that the operating costs do lie in the range of advance fees that are collected and after subtracting fixed operating costs and the unusually high rate of default losses, payday loans may not necessarily yield extraordinary profits. Based on the annual reports of publicly traded payday loan companies, loan losses can actually average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments.

Payday loan makers also argue that the interest on a payday loan is less than the costs associated with bounced checks or late credit card payments. For example, bouncing a $100 check may inccur an NSF fee from the bank of $28 and a returned check fee of $25 from the merchant!

By the end of the month, if you are faced with problems in maintaining some urgent family expenses like paying off your Medical Bills, Phone Bills, and Electric Bills, House Rent or some other utility bills pay-day loans can be the only and the best choice available. Failing to maintain a proper budget at the time of getting your paychecks or not keeping your expenses up to your income limit can lead you to tricky situation. Hence in order to meet such urgent expenses you need a payday loan.

Here is a list of things that you must keep in mind while applying for a pay-day loan
• Think before taking a payday loan: check whether you can do without it. These loans have extremely high interest rates and are best avoided.
• You should keep in mind the APR factor of the loan before taking it. You should find the company which is charging a lower APR than its competitors. 
• You should take care about the privacy of your document and information. So, if the tendency of the company is to process applicant's information in an encrypted page, you should think that your information will not be leaked out, and then you can proceed on.
• You should read the company policy and legal matters complied with before submitting an application form to them.
• Consumers should shop for lower cost credit, comparing both the dollar finance charge and the APR to get the lowest cost credit available. Online payday loans are marketed through e-mail, online search, paid ads, and referrals. Typically, a consumer fills out an online application form or faxes a completed application that requests personal information, bank account numbers, Social Security Numbers and employer information.

Borrowers fax copies of a check, a recent bank statement, and signed paperwork. The loan is direct deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday. The Consumer Federation of America (CFA) is warning consumers to exercise extreme caution when using Internet payday loan sites, where loans due by the next payday, can cost up to $30 per $100 borrowed and borrowers typically face annual interest rates (APRs) of 650%. According to a CFA survey of one hundred Internet payday loan sites, small loans involving electronic access to consumers' checking accounts pose high risks to consumers who borrow money by transmitting personal financial information via the Internet. Many surveyed lenders automatically renew loans by electronically withdrawing the finance charge from the consumer's checking account every payday.if consumers fail to have enough money on deposit to cover the finance charge or repayment, both the payday lender and the bank will impose insufficient funds fees.

Article Contributed By: Sukanya Banerjee

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