The payday loans in a nutshell.
The Cambridge Dictionary defines the payday loan as a borrowing of a small amount of money that is done at a relatively very higher rate of interest compared to the market rate of interest on borrowings. The loan is sanctioned on the expressed condition that the borrower undertakes to pay the loan either in part or in toto at the subsequent payday that arrives. Another characteristic feature of this loan is that most lenders do not expect any collateral for the sanctioning the loan. However, there may be exceptional cases where a little information about the borrower is sought and also a payday slip or a salary slip is sought in order to make sure that the borrower does not default on the loan.
Here is a list of the features of the payday loan explained in points. This will help appreciate the features of the loan better. The payday loan is always for relatively small amount of money. The subject matter of the loan can start anywhere from hundred dollars to one thousand dollars. It is because of the amount being small that lending institution whether public or private are not too keen on collecting any collateral.
The due date is always the subsequent payday and hence its name. The borrower categorically agrees to pay the loan amount on the payday that falls directly subsequent to the date of the borrowing of the loan amount. The loan can even be paid in part provided the first of the installments begin exactly on the payday that falls after the loan is borrowed. The borrower of the loan undertakes to pay up the liability by handing over a PDC or a Post Dated Check or a series of PDCs for the amount of the loan borrowed along with the interest calculated thereon.
In view of any default by the borrower in paying up the amount so borrowed or not showing up on the day of repayment, the lender is entitled to the amount of loan as well as the interest calculated thereon directly from the bank account of the borrower on the presentation of the post dated checks provided by the borrower.
Have you heard about APR?
APR is the acronym for Annual Percentage Rate. The APR is the interest that is calculated on the amount of the loan borrowed or seeked to be borrowed. The APR is always calculated according to the statutory rate that is provided by the government of the country and divided by the number of months that the loan is seeked to be borrowed. Naturally then, a lower Annual Percentage Interest is what is always sought by people who want to borrow and is always deemed to be more lucrative for regular loan seekers.
There are many ways of calculating the APR. From the point of view of a short term loan such as the Payday loan, the APR is calculated in the following three ways: The interest rate is compounded every passing period of and the processing fees is excluded from the calculations;
The origination fee is added to the interest that is compounded; In the case that the borrower default any payment or a series of payment, the rate of interest calculated at the annual rate is compounded and then added to the main loan amount.
What do lenders of payday prefer?
While the fact remains that the payday loans have excessively high rates of interest compared to the existing market prevalent rate of interest, the lenders of payday loans argue that the risk to the loan amount is also commensuratingly high and that they also do not ask for any security collateral allows them to charge a higher rate of interest from the borrowers.
In spite of the higher rates of interest, why do people still prefer payday loans?
Of course, this argument does hold a lot of water as the payday loans are indeed extremely convenient loans and they can be processed very quickly only and only because they do not need extensive paperwork like other loans and there is no need for furnishing any security collateral in order to secure the loan. Most of the people who borrow payday loans do not even bother about the higher rate of interest simply because of the convenience and quicker processing of loans that a payday loan offers. How do the payday loan lenders calculate APR? Pay day lenders use the third method of calculating the interest.
Here is an example:
A sum of 100 dollars is seeked to be borrowed at an APR of 15 dollars say for a period of two weeks. Now, at the end of the second week, the total payable amount is 115 dollars. If the borrower defaults at the end of the second week, the amount will be compounded by another similar period at the same amount of interest. That means another 15 bucks and so at the end of the fourth week, his interest is rolled over and become 130. So, every time the borrower defaults, the APR is compounded and at the end of six weeks, the APR will be 60 dollars! This is precisely why the payday loan is under a lot of criticism. But it is still popular and that is what matters most to the borrower!
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