Cash Advance Payday Loans - Friend or Foe

If you are a borrower in need of a small, short term loan to cover your expenses, then cash advance payday loans, might just be the solution for you.

The terms cash advance and payday loans are often used interchangeably. A typical loan is about $500 and has to be paid back within 30 days. Given without a credit check, these types of loans are intended to bridge the gap between pay days.

How They Work

You write a personal check payable to the lender for the amount you want to borrow, along with the stipulated fee. The company gives you the amount of the check minus the fee, and agrees to hold the check until the loan is due, usually your next payday. Or, with your permission, the company deposits the amount borrowed - minus the fee - into your checking account electronically. The loan amount is due to be debited the next payday. The fees on cash advance payday loans can be a percentage of the face value of the check - or be based on increments of money borrowed: for instance, a fee for every $50 or $100 borrowed. You are charged a new fee each time the same loan is extended.

Retail Lending

Retail lenders allow you to secure a small cash loan, usually in the range of $100 to $500, with payment in full due on your next payday (usually a two week term). You are expected to repay the loan in person at the store. In the event that you can't, the lender may process the check traditionally or through electronic withdrawal from your checking account. Payday lenders, most likely, will require you to bring one or more recent pay stubs to prove that you have a steady source of income. Additionally, recent bank statements could also be required.

Internet lending

Cash Advance online payday loans are usually advertised through e-mail, online search, paid ads, and referrals. Typically, you would fill out an online application form or fax a completed application that requests personal information, bank account numbers, Social Security number and employer information. The loan is directly deposited into your checking account and loan payment or the finance charge is electronically withdrawn on your next payday. This type of payday loan is also popularly known as quick cash advance payday loan.

The Flip Side

Payday lenders are often blamed for exploiting people's financial hardship for profit. Borrowers may not understand that the high interest rates are likely to trap them in a "debt-cycle". As a borrower, you would wind up repeatedly renewing the loan and end up paying associated fees every fortnight until you can finally save enough to pay off the principal amount and get yourself out of the debt situation.

Payday lenders, by law, can resort to the standard collection procedures to collect their debts. In case you default and your check bounces, you could be threatened with criminal prosecution, for check fraud.

The Federal Trade Commission, the nation's consumer protection agency, says that regardless of the name cash advance payday loans, these small, short-term, high-rate loans by finance companies and others come at a very high price.

Alternatives

1. A small loan from your credit union or a small loan company. Local community-based organizations may make small business loans to people.
2. Look out for the credit offer with the lowest cost, after comparing the APR and the finance charge, which includes loan fees, interest and other credit costs. The aim should be to look for the lowest APR. APR stands for Annual Percentage Rate.
3. Get in touch with your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or in developing a budget.
4. Find out if your bank will offer you overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help to protect you from further credit problems.

In a nutshell, try to find an alternative to cash advance payday loans. If you can't, then limit the amount. Try borrowing only as much as you can afford to pay with your next paycheck.