The payday loan business is one of the fastest growing segments of the consumer financial services market in the United States. It started in the early 1990's when commercial check cashing stores started offering consumers the option of taking out short term loans to help them meet the need for emergency cash until their next payday. The industries growth has made them a household name, and you will find their storefronts in most cities and towns, especially in areas where lower income residents reside.
Payday loans are short term loans of $100.00 to $500.00 that typically must be paid back within two weeks or until the next payday. The loans are unsecured and carry very high fees. While the underwriting process for payday loan vendors vary, the borrower usually must be employed, provide personal identification, and have a checking account. The lenders will use some sort of background check using credit scoring and/or databases of defaulted loans and bad checks on the borrower before the loan is initiated.
At the time of the loan, the borrower provides the payday lender with a check written in the amount of the loan plus the fee. The date on the check is typically the date of the borrowers next payday. When the loan comes due, the borrower can pay the loan off in cash and retrieve their post dated check, or allow the lender to cash the check. If the loan is paid in full the transaction is complete, if not the borrower may renew the loan.
The borrower has two ways to renew the loan. The borrower can pay off the loan plus the finance charge on the date that it is due and take out a new loan on the same day; these are referred to as renewals. The borrower may also just pay off the finance fee and write a new postdated check for the amount of the loan plus a new finance fee; these are referred to as rollovers.
The rapid growth of the payday loan industry may in part be due to the underserved groups that are not being helped by the traditional lending institutions. The traditional payday loan customer has only a high school education, very little money in their checking account, has very little other alternatives for a loan, and has been turned down in the past for more conventional consumer loans.
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