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In: Finance

What is a payday loan? Give us an example of the terms of a payday loan?...

What is a payday loan? Give us an example of the terms of a payday loan? What explains why the interest rate on such loans so high? What is your personal opinion about payday loans? What is your business opinion about payday loans?

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Expert Solution

Meaning of payday loan :

Payday loan is the monetary loan which is provided to borrowers which is to be paid in full when borrower receives their next pay check. The interest rate on these loans are usually high.

Example of payday loan:

Mr. A has liability to pay $300 to repairman for furniture repairs and he accepts only in cash. But Mr. A does not have that much cash and he has to pay within 2 days otherwise repairman will take him to court.

In this case, Mr. A can take payday loan from payday advance store only after he proves that he has next paycheck coming and by signing loan agreements. He has to write check of advance amount plus fee. Finally Mr. A can make cash payment to repairman.

Explanation for high interest:

Payday lenders charge higher rate of interest. Many states have law to limit the interest rate but payday loans are enjoying the exemptions under which they can charge higher rate of interest.

Personal opinion on payday loans:

Payday loans are useful but the interest cost on these loans are higher. There is a problem with the payday loan that borrower usually needs to second payday loan to payoff the first one and needs to for third payday loan to payoff second one and so on. It leads to bad credit ratings. It is suggested that payday loan should be avoided mostly.

Business opinion on payday loans:

Payday loans for business purpose is more beneficial due to it's higher rate of interest. Further these loans are repaid within short term period.


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