A payday loan or paycheck advance is a small, short-term loan that is intended to cover a borrower's urgent expenses until their next payday. Typical loans are between $100 and $1500, are usually on a 2 week term, and usually have interest rates in the range of 390 percent to 900 percent (annualized). They are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card.
Though payday lending is primarily regulated at the state level, the United States Congress passed a law in October 2006 that will cap lending to military personnel at 36% APR. The Defense Department called the lending "predatory", and military officers cited concerns that payday lending exacerbated soldiers' financial challenges, jeopardized security clearances, and even interfered with deployment schedules to Iraq. [1]
Some federal banking regulators and legislators seek to restrict or prohibit the loans not just for military personnel, but for all borrowers, because the high costs are viewed as an unnecessary financial drain on the lower and lower-middle class populations who are the primary borrowers.
Lenders point out that these loans are often the only option available to consumers with bad credit who have urgent expenses and cannot get a bank loan, credit card, or other lower-interest alternative. Critics counter that most borrowers find themselves in a worse position when the loan is due than they were when they took the loan, with many getting trapped in a cycle of debt.
The industry's fast paced growth indicates a highly profitable business model. Statistics show that the majority of the industry's profit comes from repeat borrowers, who are unable to pay them off on the due date and instead repeatedly renew their loans, paying fees each time.[
