Tired of spending a panicked afternoon trying to figure out where your next rent check is going to come from? Sick of returning your friends’ cans to fill your tank? Good news. There’s a better option. Short term loans, sometimes called payday loans, are small unsecured cash loans that can get you out of a jam.
Payday loans can be procured in a couple of ways. Traditionally, borrowers would visit a payday lending store, but in recent years online loans have become available. Regardless of the location, the general concept is the same. The borrower is granted a small cash loan that is due for repayment on a particular date, usually on his or her next payday.
Borrowing in Person
When borrowers visit storefronts to take out payday loans, they are required to write postdated checks to the lender that cover the full amount of the loan plus fees. If the borrower does not repay the loan by the agreed upon date, the lender can redeem the check. Borrowers taking out payday loans in person are usually required to provide some verification of employment or income, like pay stubs or bank statements.
Borrowers can now complete loan applications online or via fax. Online payday loans are then transferred to borrowers’ accounts through direct deposit. The loan repayment and finance charge is electronically withdrawn on the borrower’s next payday.
Keeping Payday Loans Safe and Reputable
Thirty seven states have laws regulating payday loans, and the other thirteen don’t allow payday loans. Laws regulating payday loans usually come in the form of interest rate caps. For example, in the state of Illinois, payday loans cannot exceed $1000 or 25% of the borrower’s monthly gross income, whichever is less. The reasons for these laws are criticisms that payday loans drain money from low income communities.
However, some research has shown that the benefits of payday loans far outweigh the costs. The fees and interest rates charged are in line with the cost of operating a payday loan lending business, especially given that loan losses often average 15% or more of loan revenue. Payday loans also provide an alternative for high risk borrowers who might otherwise have to turn to illegal sources. One report even found that payday loans improved household welfare.