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Payday Loan

What is a payday loan?
A payday loan is a small short term loan that amounts to not more than 750 pounds. The purpose of the loan is to bridge the burrower’s cash flow gap in between his paydays. Payday loans can also be referred to as cash advances.

Process of payday loans
A payday loan, being small in nature is typically given in cash straightaway. The loan is secured by the borrower’s post dated check. The amount on the post dated check includes the original loan principal and the interest rate as decided. The maturity date of the payday loan is usually the same as that of the borrower’s next payday. On the date of maturity of the loan the lender withdraws funds with the borrower’s check or can get the funds transferred electronically to his account with the permission of the borrower.

How do payday lenders operate?
Since the amount of loan is small it is often individuals who turn up as lenders in payday loans. These individuals operate from their home or from a small shop or office. However financial institutions have also began to provide payday loans and they offer variations on the payday advance. Some banks also offer direct deposit advance for customers whose paychecks are deposited electronically. When the customer requests the direct deposit advance, he receives a predetermined, small cash advance. On the next deposit by the bank in the customer’s account, the advance amount plus a fee of 10-20% is deducted from the deposit to be made in the customer’s account.

How it works?
In the UK, the payday loan is governed by the laws of the state the particular bank is situated in. The bank follows rules that are specially implemented for payday loans. Let's take an example. A borrower who seeks a payday loan will write a post dated check of 115 pounds for a cash advance of 100 pounds. The lender agrees to keep the post dated check until the borrower’s next payday arrives. At that time the borrower has the option to redeem the check by paying 115 pounds in cash or refinance the check by paying a fee to extend the loan for another two weeks. If the borrower fails to refinance the loan then the lender deposits the check in the bank. In the above example the cost of the initial loan is 15 pounds.

Payday loan - A subject of controversy
A payday loan has become the subject of controversy. This is because it is often observed that the lenders target the young and poor people in low income communities who may not understand the time value of money. As a result the borrowers are not able to pay back the loan on time and hence the interest rates on the unpaid dues shoot up. There have been instances where the lenders know from the beginning that the post dated check of the borrower is bad from the beginning. After that the payday lenders pursue criminal bad check charges against the borrower. The payday loan makers on the other hand argue that the interest on payday loans is competitively lesser than the costs associated with bounced checks or late credit card payments.


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