As the name suggests, the payday loans are very short term loans, typically between the two consecutive pays, usually for a period of 2-4 weeks. These are small amount loans taken to meet some immediate requirement when it is not possible to ask the friends and relations for the same. These carry heavy interest rates. It is not surprising to find the rates being quoted in the region of 30-35%. To prevent the borrowers from exploitation by lenders, many of the states which allow this cheap payday loans lending are required to quote only the annual percentage rates (APRs) and not the effective annual rate (EAR). Some states cap the upper APRs. Others do not have this ceiling. EARs are based on annual compounding and are far higher than the APRs. These loans are regulated differently by different States in the US. Some do not allow these altogether. Some others which allow these have strict laws for them.
Why do the lenders like to give payday loans?
At first, there is less overall risk for this type of lending because the loan per person is of a small amount.
Second, there is a good chance of recovery of loan since it is given after duly verifying the repayment capacity of the borrower. The companies normally have this practice of taking the Post Dated Check including the fees, interest and loan principal from the borrower before lending the sum. They promise to cash the same only after the due date when the borrower fails to give the cash. In case of default in payment, the borrowers will have to bear the bounce charges of the bank.
Third, the substantial interest charge (around 35% for 15 days, or 360-390% APR) along with the fees gives a good return over investment.
Fourth, the requirements of some of the states to offer extended payment payday loans for the defaulters at no additional costs also does not adversely affect lenders. For them, it is just a matter of time before recoveries are made.
Fifth, the lenders go around the APR ceilings in their states by collaborating with the banks of the other states where these are not applicable. As per the laws in US, it the place where the bank is chartered whose rates will be applicable irrespective of the state of residence of the borrower.
One can easily have the online payday loans as well from the various lenders.
