What is a payday loan?

There are advertisements all over encouraging you to get a payday loan if money is tight. There are often situations where you need money quickly, but you don’t have any way to get it before the next payday. Still, you wonder — what is a payday loan?

A payday loan is a quick cash solution for people who have a short-term cash flow problem. The amount of a payday loan generally ranges from $100 to $1500, and is made for a short period of time – usually no more than one or two weeks.

The loan is unsecured, meaning there is no collateral, no physical item that the company has to be sure the customer pays back the loan. This is in contrast to a pawn shop, for example, where the customer leaves jewelry, a stereo, or some other item in exchange for a loan.

A payday loan generally operates like this. The borrower is short of cash, but will be getting a paycheck in the next two weeks. He or she goes into a payday loan company and writes a check for the amount of the loan they want, plus fees. The customer postdates the check for one or two weeks, depending on the length of the loan.

When the borrower gets paid, he or she takes the cash to the payday loan company, pays them and receives the check back. If the borrower does not show up with the cash, then the company will deposit the check. At that point, the money needs to be in the bank account or the borrower will pay fees for insufficient funds from the bank and maybe more fees from the payday loan institution.

There are some cautions to keep in mind if using a payday loan. First, be sure you are dealing with a reputable institution. Payday loan companies should be licensed with the state. You can check with the state Department of Financial Institutions to check the status of the company you are considering. There are many cases of fraud in payday lending, and you want to avoid those who are dishonest.

Pay careful attention to the fees and penalties. They vary widely between institutions, and some charge as much as 300 to 500 percent on these short loans. Shop around, and be wise.

You should know exactly when the loan is due, and pay it on time to avoid extra fees.

Payday lending can help out in an emergency, but it is a very costly way to borrow money. Many people get pulled into a destructive cycle with payday loans, so be careful.