Payday lending (sometimes called a “cash advance”) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. To qualify, borrowers need only personal identification, a checking account and income from a job or government benefits, like Social Security or disability payments. Research shows that the payday lending business model is designed to keep borrowers in debt – not to provide one-time assistance during a time of financial need.
Signs of a predatory payday loan
Before you fall victim, check out the typical warning signs of a predatory payday loan. Remember, it’s your money and someone else wants a large piece of it. Protect yourself and your family.
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- Triple digit interest rate
Payday loans carry very low risk of loss, but lenders typically charge fees equal to 400% APR and higher.
- Short minimum loan term
Seventy-five percent of payday customers are unable to repay their loan within two weeks and are forced to get a loan “rollover” at additional cost. In contrast, small consumer loans have longer terms.
- Single balloon payment
Unlike most consumer debt, payday loans do not allow for partial installment payments to be made during the loan term. A borrower must pay the entire loan back at the end of two weeks.
- Loan flipping (extensions, rollovers or back-to-back transactions)
Payday lenders earn most of their profits by making multiple loans to cash-strapped borrowers. Ninety percent of the payday industry’s revenue growth comes from making more and larger loans to the same customers.
- No consideration of borrower’s ability to repay
Payday lenders encourage consumers to borrow the maximum allowed, regardless of their credit history. If the borrower can’t repay the loan, the lender collects multiple renewal fees.