Finance Roll

Check loans, also known as "payday loans," "cash advance loans," "check advance loans," "post-dated check loans," or "deferred deposit loans,"are small, short-term, high-rate, loans given out by check cashers and finance companies as an advance to borrowers who need to pay bills or cover expenses before their next paycheck will arrive.

To secure a check loan, the borrower writes a personal check to the lender for the amount being borrowed, plus an additional fee. The lender then holds the check and gives the borrower the money requested-minus the fee-to be repaid to the lender when the borrower's next paycheck arrives. If the borrower gives permission, the lender can electronically deposit the check loan directly into the borrower's bank account, and then debit the loan amount, plus fees, once the borrower's paycheck has been deposited in the bank.

The catch with check loans is that they come with expensive interest. The federal Truth in Lending Act requires that check loan lenders must disclose the cost of all check loans upfront, including all fees and annual percentage rates (APR). However, even with those guidelines in place it is important to note that there aren't any specific terms about how check loan fees may be applied. Some lenders determine their fees based on a percentage of the loan amount: for instance, a 10% fee would mean a borrower would end up paying $110 dollars for a $100 loan. Other lenders determine their fees based on increments of money borrowed. Say a $15 fee for every $50 borrowed, $20 fee for loans of $50-$100, and so on. If the borrower can't repay the check loan when his next paycheck comes, the loan is rolled over until the next payday, the lending fee gets applied a second time, and the hole deepens for the borrower. Factoring in the APR (usually 390%-780%), if the borrower must extend his $100 check loan three times or more, he can quickly find himself in situation where he is trying to payoff a loan that has swollen to nearly double the amount he initially borrowed.

In that sense, there are very few guardrails to keep a check loan borrower from falling into the trap of loan default or soaring interest rates. So long as a borrower has a steady source of income, and an active checking account, most lenders will approve him for a check loan despite poor credit history. In fact, a lot of lenders probably hope that their borrowers will be forced to extend their check loans; it guarantees the lender will make a bigger profit off the deal.

Bottom line: check loans are best suited for people who have a firm grasp of their funds, and are only pursuing a check loan just to get that extra push they need to cover some immediate expenses. Besides that example, a check loan is never the most prudent loan to secure. Borrowers facing financial difficulties month to month, or who will still be in debt once the check loan is spent, are better suited sitting down with their financial institution or credit counselor and working out a plan to take out a small personal loan of some kind.