A payday loan is a small loan that has to be paid back in a very short amount of time, within two pay periods. It has a definite due date for full repayment, unlike an open-ended account (such as a credit card.) Payday loans have an extremely high interest rate, plus fees that the lender will charge you just for taking out the loan. The annual percentage rate of interest is limited to 36%, but that is very high for a short-term loan. That is a huge burden that you should not carry. For this reason alone, these are loans to be avoided.
Payday loans are sometimes called cash advance loans or check advance loans. The names of companies that make such loans often contain words such as “fast” or “quick.” It may be fast or quick, but it’s almost always a very bad idea.
Here’s how it works: Let’s say you believe you’re in immediate need of $500. You decide to borrow it from a payday lender. The lender will ask you to write a personal check to them in an amount large enough to cover the principal amount borrowed ($500), plus a loan fee, plus a verification fee, plus the amount of interest you’d owe if you didn’t pay it back until the due date. The amount of the check you write to the lender could be about $620. The payday lender then gives you $500 in cash. When the loan comes due, you either pay the lender the $620, or you just allow the lender to cash the $620 check you wrote to them. So, you just paid $120 for the use of $500 for that very short time. That’s a terribly high price to pay, and an unwise use of your money.