Payday Loans - Be Aware

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!