How does a Payday Loan work?
January 7, 2008
The old economy created the idea of living paycheck to paycheck. As if that wasn’t bad enough, in today’s economy many don’t even get to the next paycheck. So, the potential borrower writes a personal check payable to the lender for the amount she wishes to borrow plus a fee.
The lender cashes the check and keeps the fee of course. Ideally this type of loan will get the borrower room to breathe and she can pay off the loan when she gets paid.
Lets take a look at an example. Ms. Susan Borrower needs $200 and the cost is $30. She writes a check for $230 and the payday lender agrees to hold the check until your next payday that is usually 14 days away.
After 14 days, depending on the particular plan, Ms. Borrower takes $230.00 in cash to the lender and takes back the personal check she wrote. Or, she can roll-over the check by paying a fee to extend the loan for another two weeks. Each time she rolls-over the check, she will pay a fee that in this example was $30. In theory, if she rolls-over the check for one year, she ends up paying $30 for 26 times or $780 for borrowing $200.
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