Bridging the Cash Flow Gap

A payday advance loan is a cash advance that a borrower resorts to bridge the gap of cash flow between pay days even without a credit check. Payday advance loans can also be cash advances through a line of credit, usually with a credit card.

Typically, when applying for a payday advance loan, the borrower issues the lender a post dated check that includes the principal amount and the accrued interest that has been agreed on between the two parties. Payday advance loans are usually borrowed on small amounts with the maturity for payment coinciding with the borrowers next payday.

When the date of maturity for the loan comes, the lender processes the payment through the borrower's paycheck or through electronic means.

While a payday advance loan may be filed with small lenders, large financial institutions and loan service providers can also provide these type of loans. Many banks for example offer a direct deposit advance for customers with paychecks, waiting for maturity, that are deposited in the borrowers account. A payday advance loan can also be applied with some income tax processing firms that has partnered with lenders offering "refund anticipation loans".

To illustrate, a payday advance loan applicant writes a check that is payable to the lender with the amount on the check that he wishes to borrow (for example $300) plus the interest or the service fee (let us say 15%). The total amount on the check that the borrower gives to the lender will be $345. The lender then advances the borrower the amount that is applied for ($300) minus the service fee ($45.) 

The payday advance loan applicant may also extend or "roll over" the amount until his next pay date and additional fees will be charged for the extension.

Like all types of credit, the cost of loans must be disclosed, as stipulated under the Truth in Lending Act. Together with the information, the borrower must also receive in writing the finance charge and the APR (Annual Percentage Rate) which is the cost of credit on an annual basis.

There had been a lot of controversies regarding payday advance loans. Most critics claim that it targets the poor, the young, and those with income in the low bracket - families and individuals who have the least capacity to pay back a loan. Some critics go farther by describing payday loan providers as loan sharks because of the high interest rates, normally reaching 250% when computed on the APR.

Those that defend the high interest rates on the other hand claim that the interest being charged on payday advance loans do not differ much from their counterparts in the business that finances mortgages. Payday advance loan providers argue that the regular interest rates of their lower and shorter-term loans would not be profitable.

In all controversies of the pros and cons, it is clear that payday advance loans are necessary services that are provided to those that need to tide a budget over until the next payday. An applicant then can resort to finding the correct options for their financial situation.
As payday advance loans are usually borrowed in small amounts, check first if you can get an advance from your company to avoid the interest. A small advance from your credit union will also be a good alternative. As much as possible credit cards should not be regarded as a first resort since credit card companies may charge even a higher interest than a small loan company. Their interest rates differ and you can check the terms before you decide. Local community based organizations that offer loans to small businesses can also be a resource to look into.

If the most logical option is to apply for a loan, shop around and compare the interest rates of the payday advance loan providers. Apply with the company that has the lowest annual percentage rate. If you intend to pay back your payday loan on time you should not have an issue with these types of loans.