Payday Loan Mechanics
Posted on Monday, July 12th, 2010 at 10:07 am in Helpful Payday Loan Info
If you’re considering a payday loan, you probably have some questions about how the lending process works. We get questions from our customers all time time about using and paying back their payday loans and short term cash advances. Here’s a simple summary of the ins and outs of payday loans to help you better understand the mechanics of payday lending.
The Basics
Think of a payday loan as a cash advance on your next paycheck. If your closest payday isn’t due for another two weeks but you have an expense that you need cash for now, you can take out a small loan against the partial or full amount of your next pay check. The length of your cash advance loan is determined by your pay schedule. If you receive your pay bi-weekly, you may borrow a payday loan for the two weeks between checks. If your employer pays you once a month, you may borrow a longer payday loan for 30 days. When your loan is due, you should pay your lender in full with one lump sum deducted from your bi-weekly or monthly wages.
But what if your financial circumstances leave you unable to repay your loan in full on the due date? Your lender might present you with some alternate financing charges, such as only paying the lending fee and renewing the principal amount for another two-week or one-month term. Your lender might also allow you to pay back your loan in several smaller installments, depending on the payday loan laws in your state.
APR and Interest
Our customers frequently ask about the interest and annual percentage rate (APR) associated with their payday loans. Fees vary by lender, so it’s difficult to estimate an average charge. Generally you can expect your lender to charge between $15 and $20 for every $100 you borrow.
APR is an ineffective measurement of a payday loan’s value. APR is used to compare forms of long term lending, like home loans or credit card payments. Since a payday loan is paid back in a much shorter period of time, APR calculations are inaccurate. If you repaid your payday loan in installments over a full calendar year, you might see the 1,500% APR and above that critics routinely quote, but this is usually not the case. Payday loans are designed for short term lending and can’t be compared using the APR of long term loans.
These are just the basic questions we run into every day. If you want to learn more about payday loans and cash advance loans, read our FAQ and educate yourself with the articles on our blog.
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