Payday Loan- How it works?

Payday loans are the latest craze among people who are in need of immediate cash but cannot avail traditional loans because of bad credit history. The payday loans are short term and high interest loans. In case of payday loans the borrower generally requires only small amount of money and for a short period of time or to be more precise till their next paycheck. The loan amount varies from &100 to $1000 and sometime it may be extended to $1500. The rate of interest on such loans is very high and ranges from 10% to 30%. This is because these loans are given for a short period of time and the risk involved in giving such loans are very high. Higher the risk, higher is the rate of interest.

Now you must be thinking how the payday loan works? Well! When a person applies for payday loan he writes a personal check which is payable to the lender and is of the amount which the borrower wants to borrow. They must also add the fees amount to the check given. If they do not add the fees to the check, the lender gives the borrower the same amount minus the fees. The borrower holds the check for the time the loan is due and is usually till the borrower gets his next paycheck. The whole process can also be done electronically, that is the borrowed amount is transferred to the account electronically and also the same withdrawn when the loan due date gets over. The fees charged on the loan are percentage of the loan taken or is a particular fees per $50 or $100 borrowed. So, a new fee is charged every time the same loan gets extended or is rolled over.

It is federal government law that the lender must tell the borrower the exact cost of taking the loan. They must provide the borrower the charges for finance and the annual percentage rate generally known as APR and that too in writing before he signs the loan. The APR is dependent on many things like the amount of money borrowed, the interest rate on the borrowed money, the time for which the loan is taken and the last but not the least the cost of credit that you are being charged. All these factors should also be considered while selecting lender for your payday loan.