Payday loan is a more commonly used term for a cash loan. This is a short term cash advance loan availed by borrowers as a stop-gap income until, their next payday. One’s eligibility for a cash loan is dependent on their previous payroll and employment records. The APR for a cash loan is much higher than a traditional loan, with 35-40% generally being the norm.
The process is generally as follows:
â€¢ In the retail model, the borrower visits the lender to apply for a cash loan. Upon meeting the requirements, the loan is granted- it needs to be paid in full at the next pay day along with the fees levied. As a security measure, the lender procures a post-dated cheque from the borrower for the required amount, which would be redeemed by the lender in case the borrower does not make the payment. In the case of insufficient funds or untimely funds availability, the borrower will face additional charges from their bank and lender.
â€¢ There are many online cash loan lenders. The process from application to receiving funds, everything is done online and is much swifter. The loan repayment amount is also electronically withdrawn from the borrowerâ€™s bank account.
Criticism on cash loans:
â€¢ The main criticism of a cash loan is that it leads to money being drained from low-income families. These social groups are found to have low credit scores and are unable to procure a traditional loan. Cash loan being short term unsecured loans, charge a higher interest rate, thus contributing to the financial decline of these communities.
â€¢ Another criticism of the cash loan is its nature to roll over to another term with additional fees if the repayment is not made in full. This feature makes the payday loan expensive for the borrower who is already financially strapped.
â€¢ The methods used by lenders to collect their payment amount has to adhere to the fair debt collection practices act (FDCPA). In spite of this, some lenders use unsavory methods that inadvertently prohibit the borrower from paying back on time and thereby incurring more fees.
â€¢ All cash loan lenders charge their borrowers the maximum fees and rates allowed by local law so as to have a consistent market rate and prevent competition.
In spite of the many potential pitfalls of a cash loan, the fact remains that those who avail this have already exhausted the other alternatives. To avoid seeking illegal sources to meet financial needs, a cash loan borrower must be well equipped with the process involved, so that the best option can be chosen.