Payday loans are short-term, small-dollar, unsecured loans that
borrowers give their word to repay out of their next paycheck or
regular income payment. Payday loans are usually charged at a
fixed-dollar fee, which is like the finance charge to the borrower.
Because these loans have such short terms to maturity, the cost of
borrowing, expressed as an annual percentage rate, can range from
three hundred percent to one thousand percent, or more. In return for
the small loan which is usually less than five hundred dollars the
borrower provides the lender with a check or debit authorization for
the amount of the loan plus the finance charge. The lender agrees to
defer presentment of the check until the customer's next payday. At
the next payday, the customer may redeem the check by paying the loan
amount plus the finance charge, or the lender may cash the check. In
some cases, the borrower may extend the loan by paying only the
finance charge and writing a new check. Typically, payday loan
borrowers have cash flow problems and few, if any, lower cost
borrowing alternatives. Payday customers tend to be frequent users of
payday advances, often choosing either to "roll over" their credits
or to obtain additional subsequent extensions of credit. Many payday
customers often experience cash flow difficulties even after
borrowing the payday loan, which in the long run makes no difference
if they borrowed the cash or not.