Why are payday loans called payday loans?

The term “payday” in a payday loan refers to when a borrower issues a post-dated check to the lender for the payday's salary, but receives part of that payday amount in immediate cash from the lender. A quick loan is a type of short-term loan in which a lender will grant you high-interest credit based on your income. Your capital is usually a part of your next paycheck.

Quick loans

charge high interest rates for immediate short-term credit.

They are also called cash advance loans or check advance loans. Payday loans are designed to cover short-term expenses and can be requested without collateral or even a bank account. This federal law enacted an interest rate limit of 36 percent, the first of its kind, for payday loans granted to military service members and their immediate family members. Credit bureaus, the companies that calculate credit ratings, can keep records of traditional loans for six to 10 years, which in turn may affect their ability to borrow money in the future.

The federal Truth in Lending Act requires payday lenders to disclose any financial charges imposed on a loan. If you can't repay the loan on time, the fees can add up, leading to a debt trap that's hard to get out of. In some cases, payday loans may be structured so that they can be repaid in installments over a longer period of time. The loan amount is directly deposited into the account and the borrower gives the lender the right to electronically deduct the full amount from the account on the due date.

However, if you fall behind on payments or if you can't pay and don't pay your loan fast, the same might not happen. To calculate the APR, compare the interest and fees on the amount borrowed with the amount requested over a one-year period (see Calculating the APR for a quick loan). This can be dangerous for borrowers because it can mean that they will have to borrow more money to cover the cost of the first loan. On the other hand, if you don't pay your loan and your debt goes to a collection agency, you'll see a drop in your rating.

Those protections include a 36 percent limit on the military annual percentage rate (MAPR), as well as other limitations on what lenders can charge for payday loans and other consumer loans. These short-term loans are usually for small amounts and often come with fixed fees based on the amount of the loan. If you can't afford a quick loan, your bill may be sent to a collection agency, which will sue you for the money and interest you owe. Online payday loans have the same basic structure as store loans, with the exception that all communication is done online.