‘Payday loan’ is a term sometimes used to describe a short-term cash loan that consists of a small cash amount that is usually expected to be repaid within a few weeks. These loans are often used to cover the borrower’s expenses until they can receive their next paycheck, causing them to be commonly referred to as payday loans or paycheck advances. Occasionally, they are also called cash advances. In thirty-seven American states, this type of lending is legal and regulated; however, in others it is either illegal, or there are strictly enforced laws that do not make it feasible. Mainly, these laws center around interest rate caps that relate to the national annual percentage rate, or APR. For the short term loan lender, there is a substantial risk, and some states have such a low rate cap just so businesses that provide cash advances can exist.
In a traditional retail model of payday loan lenders, the consumer visits an actual lending store in order to apply for a small, cash loan. Once qualified, they write a check that is dated after their next payday, addressed to the lender, for the full amount of the loan plus any applicable fees. At the time of the borrower’s next paycheck, they are required to return to the store and repay the loan. The postdated check is for instances in which the borrower does not appear in person to repay the money owed. If this occurs, the lender may decide to redeem the postdated check at that time. This provides an incentive to appear in person, as the borrower may face additional fees if the account has insufficient funds and the check bounces. In addition, the loan may now incur increased interest and/or late fees, as decided by the lender.
Due to the now widespread use of the Internet, many companies who used to operate solely out of brick and mortar locations, now have online options. Other lenders conduct business solely online. This migration to the online market has made the payday loan option much simpler for everyone involved. Now, borrowers can get what they need online rather than working around the hours and hassle of traveling to a traditional lending ‘store’. Companies such as the Montel Williams-endorsed Money Mutual have large networks of online lenders that will match consumers based on the information they provide. The beauty of online short term cash loans is that lenders rarely run credit checks, meaning that even those without spotless credit can qualify. But, they do require that potential borrowers have a steady source of income and are of borrowing age.
