A payday loan is a short-term loan against your next paycheck. Usually a borrower writes a check for the amount needed -- plus a fee – and takes the cash. The lender holds your check until you take in your paycheck.
Pros: For some people, small short-term loans “get them by” until the next paycheck so they can keep food on the table and bills paid. However, this is a very expensive form of credit, and often leads to greater long-term debt.
Cons: The cost of a payday loan is deceiving. For example, if you write a personal check for $115 to borrow $100 for 2 weeks, the $15 fee actually represents an annualized percentage rate (APR) of 391%. The average APR for payday lenders is around 390%, with some charging as much as 1,000% or more APR if the borrower keeps “rolling over” these expensive short-term loans.
For more information, go to this Federal Trade Commission website for an “FTC Consumer Alert” on payday loans: http://www.ftc.gov/bcp/conline/pubs/alerts/pdayalrt.pdf
