Loans description
payment day loan or paycheck
advance is a small, short-term loan (typically up to
$1,500) that is intended to bridge the borrower's cashflow gap between payment days. Payment day loans 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.
Process
The loan is typically given in cash and secured by the
borrower's post-dated check that includes the original
loan principal and accrued interest. The maturity date
usually coincides with the borrower's next payment day. On
the maturity date the lender processes the check
traditionally or through electronic withdrawal from the
borrower's checking account if the borrower does not
first repay or service the loan in person.
Payment day lenders typically operate small stores or
franchises, but large financial service providers also
offer variations on the payment day advance. Some mainstream
banks offer a "direct deposit advance" for customers
whose paychecks are deposited electronically. When a
consumer requests the direct deposit advance they
receive a predetermined, small cash advance. On the next
direct deposit into the consumer's bank account that
advance amount is removed by the bank plus a fee for the
advance (usually around 10-20%). Income tax preparation
firms including H&R Block partner with lenders to offer
"refund anticipation loans" to filers.
In the United States, most states have usury laws which
forbid interest rates in excess of a certain APR. Payment day
lenders operate in those states by funding loans through
a bank chartered in a different state. Under the legal
doctrine of rate exportation, established by Marquette
Nat. Bank v. First of Omaha Corp. 439 U.S. 299 (1978),
the loan is governed by the laws of the state the bank
is chartered in. This is the same doctrine that allows
credit card issuers based in South Dakota and Delaware —
states that abolished their usury laws — to offer credit
cards nationwide.
Example
For example, a borrower seeking a payment day loan may write
a post-dated personal check for $115 to borrow $100 for
up to 14 days. The check casher or payment day lender agrees
to hold the check until the borrower's next payment day. At
that time, the borrower has the option to redeem the
check by paying $115 in cash, or refinance ("roll-over")
the check by paying a fee to extend the loan for another
two weeks. If the borrower does not refinance the loan,
the lender deposits the check. In this example, the cost
of the initial loan is a $15 finance charge, or 391
percent APR. Many states do not allow rollovers or limit
the number of rollovers but, for example, if the
borrower chooses to roll-over the loan three times, the
finance charge would climb to $60 to borrow $100. |
