Payday Loan/Cash Advance FAQ
Basics of Payday Loans

A payday loan, or cash advance loan, is a short-term, small denomination loan made against the borrower's next paycheck. The lender loans the borrower a small amount of cash that is expected to be repayed when the borrower is next paid by their employer. The cash is quickly available on the spot when the transaction is conducted in an actual payday loan store. If the transaction is conducted online, the cash is directly deposited into the borrower's bank account in a matter of hours. Cash is available more quickly through an actual store, but the application process is easier online. These types of loans are unsecured and no collateral is established during the application process. Lenders typically only require that the borrower be actively employed and have a valid checking or savings account.

Payday loans started out as additional services provided by neighborhood check cashing stores. For a fee, these establishments will cash customers' checks. Payday loans are a natural progression along this line of thought, in essence cashing a check that does not yet exist, but is expected to in the near future - again, for a fee. From their inception, payday loan outlets grew steadily alongside their check-cashing older siblings. Their viability quickly became apparent to store owners and dedicated payday loan stores branched off as establishments in their own right. Industry growth surged when cash advance loans became available online in the late 1990s. Continued growth in the industry through 2005 suggests that public demand for these types of loans has not yet been met, although the trend seems to have slowed of late.

In addition to in-store and online transactions, payday loan applications can be submitted by faxing or phone. However, the prevalence and ease of online cash advance loan application have made phone and fax applications obsolete. No faxing is typically required when submitting a payday loan application nowadays.

Payday Loans: How Much Time?

Since payday loans are typically due upon the borrower's next paydate, the duration of a payday loan is based on the borrower's paydate frequency. The length of the loan is also determined by the point in the borrower's paydate cycle at which the loan is procured. For instance, if the borrower is paid on a weekly basis every Friday and the loan is obtained on Wednesday, then the length of the loan will be two days. As another example, if a borrower is paid bi-weekly every other Friday and the loan is secured on the Wednesday immediately following a payweek, then the length of the loan will be nine days.

The loan duration possibilities differ from lender to lender. Typically, lenders prefer to offer shorter duration loans because they are more profitable. For example, take a lender that charges a flat $15 dollar fee for every $100 borrowed for up to a two week period (from 1 to 14 days). In this case, the lender makes the same $15 dollars on a two week loan or a one day loan. However, with the 1 day loan, the lender can turn around and lend out the $100 principal to another borrower the next day and thus make an additional $15 dollars. With the two week loan, the lender has to wait 14 days before the principal can be put to work again. For this reason, most lenders prefer to deal with customers who are paid either on a weekly or bi-weekly basis. Nevertheless, there are numerous lenders that will process loans for up to a month in duration.

Payday Loans: How Much Money?

The amount of money that can be borrowed through a cash advance loan and the associated fees can vary substatially from lender to lender. At the time of this writing, the extremes normally range between a minimum of $100 and a maximum of $1500. Lenders that are willing and able to provide $1500 loans are by-and-large bigger, better established operations. Smaller lenders will usually deal in smaller denominations.

The fees associated with payday loans also vary considerably from lender to lender. In addition, the fees for any given single lender may vary depending on the amount and/or duration of the loan. There is no quick and easy formula for calculating payday loan fees. The possibilities here are endless, so we will not attempt to cover this topic in detail, but will instead present a common example. In this case, the lender will finance loans for up to three weeks at an APR of 485.450%. At this APR rate, the fee for a $100 dollar loan after two weeks is $18.62. In fact, the lender charges $18.62 for a $100 dollar loan made for any duration between 1 and 14 days. So if a loan is taken for exactly 14 days, then the APR for the loan is actually 485.450%. However, the effective rate gets higher as the duration decreases because the borrower is paying the 14 day rate even for a 1 day loan. For loans between 14 and 21 days (2 and 3 weeks), the finance fee is calculated at an APR rate of 485.450% compounded on a daily basis. Essentially, this means that, for this particular example, the lender's published APR is accurate for loans between 14 and 21 days, but is significantly higher for loans between 1 and 14 days.

Most payday lenders use similarly confusing tactics when disclosing their fees in terms of APR. Again, there is no quick and easy formula for calculating a payday loan in terms of APR. Bottom line, expect to pay anywhere between $10 and $30 dollars per $100 dollars borrowed as a cash advance loan. Hopefully this section has made it clear that when it comes to cash advance loans, as with most consumer products and services, it pays to read the fine print and shop around for the best bargain. Comparison shopping for payday and cash advance loans can be done quickly and easily online.

Demographics of Borrowers

There is not much unbiased data publicly available describing the demographics of payday loan borrowers. Although there have been a number of studies conducted, they are invariably funded by advocacy groups and therefore yield suspect results. In an article in the Fordham Journal of Corporate & Financial Law titled "Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits" , Aaron Huckstep sums up the situation as follows:
"While much anecdotal evidence exists regarding the demographic of payday borrowers, there is relatively little unbiased and consistent large-scale data available."
He goes on to say that:
"... contradictions exist because much of the available data relating to borrowers are 'bound up with advocacy positions for or against the industry' and thus is of questionable reliability."
This seems to be the mantra in most issues related to the payday loan industry.