Articles
Payday
loan (also called a paycheck advance or payday advance) is a small,
short-term loan that is intended to cover a
borrower's expenses until his or her next payday. Typical loans are
between $100 and $500, on a two-week term and have
interest rates in the range of 390 percent to 780 percent (APR). The
loans are also sometimes referred to as cash advances,
though that term can also refer to cash provided against a
prearranged line of credit such as a credit card.
Though payday lending is primarily regulated at the state level, the
United States Congress passed a law in October 2006 that
caps lending to military personnel at 36% APR. The Defense
Department called payday lending practices "predatory", and
military officers cited concerns that payday lending exacerbated
soldiers' financial challenges, jeopardized security
clearances, and even interfered with deployment schedules to Iraq.
Some federal banking regulators and legislators seek to restrict or
prohibit the loans not just for military personnel, but
for all borrowers, because the high costs are viewed as an
unnecessary financial drain on the lower and lower-middle class
populations who are the primary borrowers.
Lenders say these loans are often the only option available to
consumers with bad credit or who cannot get a bank loan,
credit card, or other lower-interest alternatives. Critics counter
most borrowers find themselves in a worse position when
the loan is due than they were when they took the loan, with many
getting trapped in a cycle of debt.
The industry's fast-paced growth indicates a highly profitable
business model. Statistics compiled by the Center for
Responsible Lending show that the majority of the industry's profit
comes from repeat borrowers who are unable to repay loans
on the due date and instead repeatedly renew their loans, paying
fees each time.
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