Understanding the Differences Between Payday Loan Companies and Lending Practices

By on | Payday Loan & Personal Loan Information.

Over the past few years, the popularity of payday loans has increased.  Many Americans have either used these personal loans themselves or at least know someone who has.  Payday cash advance loans are low-cost, easy to qualify for, and can be done either online, by fax, or through a neighborhood lender. 

Payday loans are typically done on a short-term basis; the length of time varies per lender.  Generally, the money borrowed is due on the borrower’s next payday, which can be anywhere from a week to 14 days. 

Because payday loans are comparatively short-term, most lenders charge a loan fee instead of Annual Percentage Rate (APR).  The APR is an interest rate that signifies the yearly cost of credit.  Since a payday cash advance loan is actually designed to be repaid in full within two weeks of the loan date, charging APR on that loan would leave the loan company with a very small amount of interest. As a result, payday loan companies charge a small service fee for their loans. This service fee is usually calculated on a sliding scale, based on the amount of the actual loan.

If one was to calculate the cost of a payday loan in terms of an APR, then APR’s for payday loans are much higher than the interest rates charged on credit cards or on average loans from a bank.  However, these other forms of credit are intended for long-term use — the payday loan is not.  Since payday loans are to be repaid in such a short period of time, the fee charged on them should be viewed as an acceptable service charge.

The average lender will charge $15-20 on a two-week payday loan.  At that rate, the borrower will owe $15-20 in interest on a $100 loan.  The finance charge is determined before the borrower accepts the money, and is typically shown on the contract between the lender and the borrower.  Because the loan is short-term, the fee ends up being a low cost one, especially considering the APR cost of the loan.

Each payday loan lender operates under their own guidelines; so it is important to compare services before deciding on a lender.  Following are a few differences to consider.

One of the differences between payday loan companies is the way the lender chooses to collect their money.  Many storefront lenders require their applicants to fill out a postdated check for the amount of the loan plus the estimated interest.  The lender will then cash this check on the agreed upon date. 

Other lenders forego the use of personal checks.  Instead, they use a system where the funds are paid to the borrower through direct deposit and the repayment is collected through the same type of money transfer.  This form is often more convenient for the lender, as well as for the borrower.  There is less hassle involved, as the borrower does not have another form to fill out; additionally, the lender feels more secure in the knowledge that they will receive the repayment funds in a timely manner.    

Another difference between lenders is seen during the application process.  In most situations, a credit check is done in order to determine approval for a loan.  This can be a concern for borrowers with poor credit.  Credit checks are a way for lenders to gauge the prospective borrower’s likelihood to pay back the loan.  If the applicant has bad credit, they may not receive the loan they are seeking. 

Luckily, the majority of payday loan companies have a “no credit check” policy.  This might seem confusing or even illogical to the average consumer; however, there are a couple of reasons that payday loans operate in this manner.  The main reason credit checks aren’t done goes back to the nature of payday loans.  They are fast, usually short-term solutions to a temporary problem.  Not doing credit checks allows the borrower get their loan very quickly.

Some payday loan companies utilize a teletrack system instead of running credit checks.  This is a way for lenders to confirm the personal information listed in the borrower’s application.  It can also reveal any outstanding short-term personal loans that the borrower might have.  Using teletrack is a quick way for lenders to verify the legitimacy of a potential borrower. 

However, there are some payday loan lenders who don’t use teletrack or run credit checks.  This is the fastest and least intrusive procedure for the borrower, but the riskiest for the lender. When a lender chooses to loan money on an unverified borrower, the payday loan company may end up loaning money to someone with bad credit who will not repay the loan, and the lender will have no recourse in being paid back.

The final way in which payday lenders vary is in the way they receive information from the consumer.  If an applicant utilizes a payday loan service through the Internet or on the phone, they might send their personal information via fax.  However, many payday loan lenders now use a faxless system, meaning they only receive information by telephone or email.   Still others operate mainly on a face-to-face basis.

It is not unusual these days to be in a situation where some extra cash is needed.  In these instances, payday loans may provide a quick, convenient, cost-effective solution.  Almost anyone can qualify and applying is fast and easy.  There are a few subtle differences in each company’s procedures though.  So, take some time now to find a company who can best serve your needs. Hopefully, you will not need to use a payday service, but if you do, you will already have the right information to select the best lender to serve your immediate financial needs.