Definition
A payday loan is a high-interest, short-term loan made to consumers that is frequently secured only by a postdated check.
Analysis
Payday loans are generally provided for a term of 2 weeks, in which the borrower must pay a fee if they do not repay the loan at maturity. This is called rolling over or flipping the loan. Retailers that provide payday loans are a type of fringe banking outlet.
If the borrower does not extend the loan, then the payday lender simply deposits the postdated check that secured the loan. Most payday loans are rolled over several times, costing the borrower interest rates that can exceed 400% APR.
Payday lending is illegal in a number of states, thanks to consumer advocates such as the Center for Responsible Lending in Durham, NC. Additionally, a federal law became effective in October 2007 which limits such loans to 36% APR for enlisted military personnel.
