Cash loans, payday loans or payday advances, as they are known, are simply a short term loan with the borrowers next pay day as security. The only provision is that they tender proof of employment and possess bank account. There are no credit checks and provided those minimum requirements are met, the loan will be granted in a matter of hours.
In many reports the interest rate on these type of loans are described as unreasonable and excessive. For instance, a $100 short term loan against the next pay day at 15% will mean that a borrower will pay back $115. If this is calculated over a yearly percentage rate it equates to 390%. This is a misleading calculation.
The fact remains that cash loans is not a yearly loan. It is merely a short term loan over a maximum of two weeks. If the same loan was taken out on a credit card and minimum repayments are made, the loan would still unlikely to have been paid off at the end of twelve months. The same loan taken on a personal loan over twelve months at 15% will have the lender still only paying $15 interest.
Cash loans do not allow their interest to compound irrespective of the loans term. The primary lending amount will stay the same over the period of the loan (maximum two weeks). There is a 20% default with these types of loans, therefore there is a great risk to the lender and their interest rates must reflect this.
The fundamental procedure for short term loans is for the lender to provide funds to the borrower against their next payday. It usually involves the borrower supplying a post dated check for the amount of the loan plus the cost of the loan.
With the advent of online lending the process is so much quicker and simpler. The borrower will supply bank details and the lender will withdraw the cost of the loan on the borrowers next payday. The process can take as little as one hour.
Used sensibly, cash loans are a fantastic way to relieve a tight financial situation. They are certainly a great innovation and are something that people should look closely at when a financial emergency arises.
