Payday Loans are very expensive cash advances that must be repaid in full on the borrower's next payday to keep the personal check required to secure the loan from bouncing. Cash-strapped consumers run the risk of becoming trapped in repeat borrowing due to triple-digit interest rates, unaffordable repayment terms, and coercive collection tactics made possible by check-holding.
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.
The clients of payday loan companies were mainly government employees, low-level white collar workers, skilled-tradesmen and foremen.
Eventually, the payday loan industry became a target of reformers, who prosecuted the illegal small loan companies. However, they realized that the need existed and that it was impossible to make a profit on small loans with a 6% interest rate. Therefore, they proposed higher rates limits for payday loans in exchange for licensing and regulating of lenders granting such credit. Many payday loan companies came to accept such proposals, and in 1917 a committee of reformers and small loan companies agreed on model legislation, the Uniform Small Loan Law. The subsequent passage of small loan legislation in many states enabled creditors to make small loans profitably and allowed emergence of the modern finance company industry.
Payday Loans companies served the borrowing needs of moderate income workers. The small loan business was illegal in those times. But the usury laws were seldom enforced, and the small lending prospered because it fulfilled a real need.
