Check loans, also
known as "payday loans," "cash advance loans," "check
advance loans," "post-dated check loans," or "deferred
deposit loans, “are small, short-term, high-rate, loans given out by check
cashers and finance companies as an advance to borrowers who need to pay bills
or cover expenses before their next paycheck will arrive.
To secure a check
loan, the borrower writes a personal check to the lender for the amount being
borrowed, plus an additional fee. The lender then holds the check and gives the
borrower the money requested-minus the fee-to is repaid to the lender when the
borrower's next paycheck arrives. If the borrower gives permission, the lender
can electronically deposit the check loan directly into the borrower's bank
account, and then debit the loan amount, plus fees, once the borrower's
paycheck has been deposited in the bank.
The catch with
check loans is that they come with expensive interest. The federal Truth in
Lending Act requires that check loan lenders must disclose the cost of all
check loans upfront, including all fees and annual percentage rates (APR).
However, even with those guidelines in place it is important to note that there
aren't any specific terms about how check loan fees may be applied. Some
lenders determine their fees based on a percentage of the loan amount: for
instance, a 10% fee would mean a borrower would end up paying $110 dollars for
a $100 loan. Other lenders determine their fees based on increments of money
borrowed. Say a $15 fee for every $50 borrowed, $20 fee for loans of $50-$100,
and so on. If the borrower can't repay the check loan when his next paycheck
comes, the loan is rolled over until the next payday, the lending fee gets
applied a second time, and the hole deepens for the borrower. Factoring in the
APR (usually 390%-780%), if the borrower must extend his $100 check loan three
times or more, he can quickly find himself in situation where he is trying to pay
off a loan that has swollen to nearly double the amount he initially borrowed.
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