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  • If you're low on cash, taking out a payday advance may seem like a good idea. You will get money right away and you can simply pay it back when you get your paycheck. However, before getting a payday loan, you need to understand how payday advance companies work.

    Procedure

    If you are short on cash and have a job, you can go to a payday loan company and take out a loan. To get your loan, you write a personal check for the amount of the loan plus a finance charge to the company and post date it, using the date of your next paycheck.

    Qualifying

    Unlike most other loans, such as a mortgage or credit card, payday advances do not require a credit check or any other evidence that the borrower will be able to repay the loan.

    Profit

    Payday advance companies make money by assuming that a large number of those who take out a loan will be unable to pay it back with their next paycheck, increasing the amount of interest the company will earn.

    Contingency

    Those who cannot pay back their loan on the agreed date can either extend their loan by paying additional fees or else can take out another loan to cover the one owed.

    High Interest Rates

    Interest rates on payday advances are incredibly high, up to 780 annual percentage rate, in the case of short term loans. If you borrow $200 for two weeks, with an interest rate of 500 percent, you will end up paying nearly $40 in interest.

    Source:

    State of Wisconsin Department of Financial Institutions: Payday Loans

    Payday Loan Consumer Information: How Payday Loans Work

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