Are Cash Advance Loans Legitimate?

Rather than secure a loan against a car, house, or other valuable possession, a payday loan company will secure the loan on just a piece of paper: your personal check. To protect themselves, they will of course ask you for as much information as they can: expect to supply credit card details, your social security number and bank account details when you apply for your loan. The check the company requires will be post-dated and will cover the amount of the loan plus interest and any fees the company charges. Normally, the check will be dated for cashing within two weeks, which should cover the time to your next pay check.

You will also have to sign a contract confirming the terms of the loan.

The first question that likely comes into your head, is, what's the deal here? How can a company operate like this? It's a simple answer; the company's fees represent a massive profit for very little effort. They are also generally low-overhead businesses which don't need a fancy address and will very likely pay their employees relatively low wages.

Let's take a $300 payday loan as an example with a fee of $10 on each $100 loaned. In two weeks, the loan will be repaid with $30 on top, which amounts to a rate of interest of 10% over 14 days. This may sound reasonable, but when you translate this rate into the usual Annual Percentage Rate that companies quote for their loan rates, it's 3,000%. That's a good deal for the loan company.

Here are some of the precautions you should consider whether you are applying for a loan or considering getting into the business yourself.

• When you take out a payday loan, look out for penalty charges for early repayment. These are common for many types of loans, so make sure you check the loan agreement carefully.
• Also, check out what the penalties for late payment are. These can be punitive and might even include a doubling of the service charges if you're late by just a day.
• Look out for membership fees: some payday loans companies will ask you to pay to become a member before you can get your hands on any cash.
• Protect your bank account. On no account should you allow a loan company direct access to your bank account.
• Don't sign anything you don't understand: read all paperwork carefully and if it's not clear ask for an explanation and if that's not forthcoming, take your custom elsewhere.
• Beware of bouncing checks: if your repayment check bounces, the loan company will charge you extra, and so will your bank, a double hit, at a time when you need to be careful with your cash.
• Don't put up what you can't afford. If a payday loan company asks for extra collateral then make sure it's something you can afford to lose. If you can't live without a car, don't use it as collateral for a loan.