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Considering A Payday Loan? Here's How To Read The Payday Loan Agreement

Apr 26, 2008
Fast cash advances are very popular, and can be a great way of dealing with financial emergencies. When you are short on cash and between pay periods, one of the most popular ways to gain access to funds is to take out a payday loan (aka a cash advance, paycheck loan, or pay loan). Most people who take payday loans do it for financial emergencies, and just want to get the cash quickly. However, you need to take a few minutes during the process and read the loan agreement. Payday loans can be quick and convenient; they typically do not require any credit check and, unlike regular bank loans, you secure the loan with a promise to pay back the amount borrowed from your next paycheck. Often, all you need to qualify is a job and a regular paycheck!

The key to understanding how much you will need to pay back (and when) is sometimes confusing. All payday lenders need to disclose the terms in a legal document called a "TILA" or loan agreement. These documents are required by a law called the Truth in Lending Act. This law requires that the cost of the payday loan - like other types of credit - must be disclosed. As part of a payday loan application process, this is provided by way of a payday loan agreement, which you must review and sign. Among other information, this agreement discloses:

* The total amount financed (the amount being borrowed)
* The finance charge
* The Annual Percentage Rate (APR)
* The terms of "repayment."

The fee, or finance charge for the loan is the dollar cost of the loan, and includes the dollar cost of all the interest to be paid over the term of the loan and the cost of all charges imposed by the lender. Typically this is expressed as set fee charged per amount borrowed - say, for every $50 or $100 loaned. The loan agreement must also express this as an APR, which is the cost of credit on a yearly basis. This is a complex calculation designed to provide a uniform "true cost of credit" which the borrower can use to comparison shop. Basically, the APR assumes that the total finance charge (which is equal to the total interest on the debt plus any other charges) is paid in equal installments over the term of the loan and then calculates the amount paid each year as a percentage of the amount financed.

Since payday loans are typically very short term in nature, the APR - which represents the cost of credit on a yearly basis - is usually relatively high. For example, if you borrow $100 for 14 days and the loan fee is $15, the APR would be expressed as 391% APR. However, the APR can be very useful when comparing loans and loan fees.

When you are shopping for a good payday loan, you should remember that if you don't like the terms (or the cost) of the loan that is offered to you, you don't have to take it!
About the Author
Kurt Lehmann writes about consumer finance issues, including faxless payday loans and paydayloans . He also provides a helpful payady loan calculator .
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