What is a payday loan, paycheck advance, military loan?

These are all forms of Payday lending, which is among the highest risk subsets of sub prime lending - is characterized by small-dollar, short-term, unsecured lending to borrowers typically experiencing cash flow difficulties. Payday loans, paycheck advances and military loans are unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment. Payday loans, paycheck advances and military loans are usually priced at a fixed-dollar fee, which represents 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 300 percent to 1,000 percent, or more. In return for the small loan - usually less than $500, 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.

At the beginning of the 1990s, payday lending was primarily the domain of smaller independent check cashing outlets and pawnshops that offered services related to check cashing. These firms specialized in making high-priced loans to borrowers with limited access to credit. The number of payday lenders, however, has surged in recent years as more companies have been attracted by the higher fees earned on payday loans, as well as a high level of consumer demand for short-term, small denomination credit. New payday participants include large regional or national multi-service providers of payday loans, paycheck advances and military loans, large regional or national loan entities, and insured depository institutions. Although the number of known insured depository institutions involved in payday lending is small, third party payday lenders are actively seeking relationships with insured financial institutions. This is happening because of the higher fees the companies offering these loans can collect in a short amount of time, from you the consumer.
Depository institutions involved in payday lending also may enter into arrangements with third parties to originate payday loans, paycheck advances or military loans. These loans often involve fees and charges in excess of those the third party could otherwise charge under state law. Although federal banking statutes authorize insured depository institutions to "export" interest rates from states where the lender is located on loans made to borrowers residing outside the state, resulting in double fees to the customer! Some litigation has begun to surface that alleges lender violations of various state and federal consumer protection laws in connection with these loans.

Typically, payday customers have cash flow difficulties and few, if any, lower-cost borrowing alternatives. Payday loans, paycheck advances and military loan customers tend to be frequent users of these loans, often choosing either to "roll over" their credits or to obtain additional subsequent extensions of credit. This data indicates that the cash flow difficulties experienced by many payday loan, paycheck advance or military loan customers are a long-term credit characteristic as opposed to a short-term temporary hardship.

If the customer can't repay the loan, he or she will also run into more problems. Customers who default on payday loans, paycheck advances or military loans typically receive two insufficient funds charges; one from their bank and one from the payday lending company. The defaulted loan may be turned over to a collection agency, and the defaulting customer may be reported to the major credit reporting services. These payday lending companies may change their policies, terms, and conditions at any time and without any notice. Before accepting a loan, make certain to read and understand all the terms and conditions contained on the payday lending company's website and/or documents.

Better yet, avoid them altogether. The intent of this website is to bring to the public the dangers of payday loans, paycheck advances and military loans and make clear the laws regarding them.

Information within this page was collected, written and designed by:
Sgt. S. Foster US Army

Contact: S.Foster @ US.Army.mil