Payday loan

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A payday loan or paycheck advance is a small, short-term loan that is intended to cover a borrower's urgent expenses until their next payday.[1] Typical loans are between $100 and $1500, are usually on a 2 week term, and usually have interest rates in the range of 390 percent to 900 percent (annualized). They are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card.

In the United States, regulation or these short-term loans rests in the hands of state legislatures. Critics of the payday loan industry argue that the lenders trap consumers in a cycle of debt.[2] Lenders point out that these loans are often the only option available to consumers with bad credit who have urgent expenses and can't get a bank loan, credit card, or other lower-interest alternative.

Where the law has prohibited payday loans, some loan companies re-invented themselves as leasing or internet-service companies, "giving" consumers a cash "rebate" if they signed up for a spurious product, for which they would pay a sum much larger than the amount of the "rebate" over the course of several months. [3]

The industry's fast paced growth indicates a highly profitable business model. Statistics show that the majority of the industry's profit comes from repeat borrowers, who are unable to pay them off on the due date and instead repeatedly renew their loans, paying fees each time.

References

  1. See Payday Loans Cost the Poor Billions, and There’s an Easy Fix By FREDERICK WHERRYOCT (October 29, 2015) at http://www.nytimes.com/2015/10/29/opinion/payday-loans-cost-the-poor-billions-and-theres-an-easy-fix.html?_r=0
  2. See Payday Loans — And Endless Cycles Of Debt — Targeted By Federal Watchdog by Scott Horsley (March 30, 2015) at http://www.npr.org/2015/03/26/395421117/payday-loans-and-endless-cycles-of-debt-targeted-by-federal-watchdog
  3. See, e.g., a North Carolina Attorney General's report at http://www.ncdoj.com/DocumentStreamerClient?directory=PressReleases/&file=paydaylenders3.06.pdf