A Payday loan is a cash advance (loan) from a
payday lender to a financially-strapped consumer (borrower) before the borrower
receives his or her paycheque. The loan however may not be linked to the
borrower’s payday and can be a mere cash-advance.
For a Payday lender these loans
bear a sizable risk since the loan itself is unsecured and the rate of default
can go over five percent. Therefore the rate of interest charged on these
short-term advances is fairly high which can make these loans very expensive.
Typically the rate of borrowing could range between $15 to $25 for every $100
borrowed on a 2-week payday loan period.
To prevent a payday lender from
charging an excessive rate of interest the maximum rate of borrowing is set by
the jurisdiction in which the payday lender is operating. For example the
maximum cost of borrowing in the province of Ontario, Canada is $21 for every $100
borrowed over 2 weeks. It works out to 562% APR. Also, if the payday loan is
greater than $1,500 or for a duration of more than 62 days then the maximum
cost of borrowing is not applicable. In Ontario a payday loan can be cancelled
in two business days of receiving the money without any penalty or fees as long
as the full amount is returned to the payday lender.
Owing to the high default rate in
this form of credit the payday lenders generally rely on aggressive collection
practices. However, these collection strategies have to abide by the same
industry standard collection practices used to collect other debts,
specifically standards listed under the Fair Debt Collection Practices Act in
the US.
In the US, Payday lending is
legal and regulated in majority of the states but there are still certain
states where payday lending is either illegal or not feasible. In Canada, there
is a Canadian Payday Loan Association (CPLA-ACPS.CA) with a Code of Best
Business Practices for its industry members.
A payday loan agreement between a
lender and a borrower must incorporate the following:
·
The ‘Amount’ that is being loaned
·
The ‘Duration’ of the loan and the ‘Date’ by
which the loan should be repaid
·
The total ‘Cost of Borrowing’ inclusive of all
fees and finance charges.
The loan is given immediately. At
the point of lending the lender should not deduct any fees. Nowadays payday
loans can be granted online where the borrower completes the loan application
online. The money is then transferred by the payday lender by EFT (Electronic
Fund Transfer) and deposited directly into the applicant’s bank account. At the
time of repayment the lender withdraws its fees directly from the borrower’s
ban account on the borrower's next payday or on the date that the
loan has to be paid by. The lender may seek additional documents by fax or
email.
A payday lender cannot generally
give another payday loan to a particular borrower until that borrower has paid
his or her first loan in full.
Remember payday loan is quick
cash and quick cash always comes at a cost!
