What is a payday loan?

Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives

Here's how they work: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower's next payday. Or, with the borrower's permission, the company deposits the amount borrowed - less the fee - into the borrower's checking account electronically. The loan amount is due to be debited the next payday. The fees on these loans can be a percentage of the face value of the check - or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or "rolled over."
The federal Truth in Lending Act treats payday loans like other types of credit: the lenders must disclose the cost of the loan. Payday lenders must give you the finance charge (a dollar amount) and the annual percentage rate (APR - the cost of credit on a yearly basis) in writing before you sign for the loan. The APR is based on several things, including the amount you borrow, the interest rate and credit costs you're being charged, and the length of your loan.
A payday loan - that is, a cash advance secured by a personal check or paid by electronic transfer is very expensive credit. How expensive? Say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 the fee to borrow the money. The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. If you agree to electronic payments instead of a check, here's what would happen on your next payday: the company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.
From other contributors:

Many check cashing businesses offer small sum, short-term, high-rate, unsecured personal loans. These go by many names, including: payday loan cash advance loan post-dated check loans deferred deposit
In a payday loan transaction, the borrower will provide to the lender items such as a paycheck stub, photo identification and a recent bank statement. The borrower writes a check to the lender for the amount and the lender's fee. Under law in some states, the lender's fee is limited. The lender agrees to hold the check until the customer's next payday, up to 30 days. At that time, the borrower may redeem the check with cash, allow the lender to deposit the check or roll over the loan by paying another fee.
Payday lenders advertise their services as a way to cover unexpected expenses like car repairs and avoid bounced check fees and late payment penalties. Potential payday loan customers should be aware of the risks and responsibilities involved with this sort of lending.
Let's say you want to borrow $200 until you get your next paycheck in two weeks. You write a postdated check to a payday lender for $230 (15% of $200 = $30 lender's fee + $200 loan amount = $230) and get $200 cash in return. The $30 interest you pay on the loan calculates to an Annual Percentage Rate (APR) of 391%. The payday lender may also charge you a one-time fee of $10 to set up an account.
If you are unable to repay the loan after the agreed-upon 14 days have elapsed, you may elect to extend the loan for another two weeks by paying an additional $30. If you choose to roll over the loan, you will have paid $60 in lender's fees for a one-month loan of $200. It's easy to see how these fees can quickly add up � if you extend the loan for a total of six months, you'll end up paying $360 in fees, without having paid back any of the principal (the original $200).
You may wish to consider these alternatives before choosing a high-rate payday loan:
Ask your employer for an advance on your paycheck.
Ask to borrow money from a friend or relative.
Find out if you have, or can get, overdraft protection on your checking account.
Find out if you can delay paying a non-interest bill such as a utility bill and make payment arrangements with the utility company.
Ask your creditors for more time to pay your bills. Find out what they will charge for this service a late charge, an additional finance charge or a higher interest rate.
If you do decide to use a payday loan:
Borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.
Always comparison-shop before selecting any loan. Compare the finance charges of credit offers to get the lowest cost. Also, find out what the total fees and penalties will be if you don't pay the money back on time.  

Payday loans are small unsecured loans, usually for a period of 10 to 15 days.

First answer by Neila222. Last edit by Sdresh. Contributor trust: 1919 [recommend contributor]. Question popularity: 208 [recommend question].