What is a payday loan?

Payday Loans Defined

A payday loan (sometimes referred to as a cash advance) is a short-term unsecured loan that usually relies on the employment and payroll records of potential consumers. The default rate on this type of loans is very high (about 10-20%), which makes these loans risky for lenders.


To minimize the defaults costs of payday loans, many lenders charge very high annual percentage rates (APR) on these types of loans. In some states, the APR that payday lenders can charge is limited by local jurisdictions (these laws are known as usury laws).

In certain states, payday loans are illegal. Examples include: Arizona, Arkansas, Connecticut, Georgia, Maine, Maryland, New Hampshire, New Jersey and New York, North Carolina, etc. Other states limit the number of payday loans a consumer can take at a given time. These include: Florida, Illinois, Indiana, Michigan, New Mexico, North Dakota, Oklahoma, South Carolina, and Virginia.

On the other hand, payday lenders in such states as South Dakota and Delaware have succeeded in avoiding the laws regulating the unreasonable and excessive rates of interest on cash advances.

All this means that payday lending activity is regulated on a state level. However, some federal banking regulators and legislators try to prohibit or are least to restrict certain types of loans for all borrowers.

Types of payday loans

Several types of payday loans are available. The most popular with Americans are: bad credit loans, instant payday loans, and faxless payday loans.

1. Bad credit loans allow borrowers to receive small amounts of money. This money is lent to borrowers with no credit history record (or those with a poor credit history), and the money is lent on a short-term basis. These are the most risky loans for lenders as the default rate on them tends to be high. On the other hand, bad credit loans give borrowers an opportunity to build or improve their credit history.

2. Instant payday loans are designed for those borrowers who need cash right away. As long as they meet the basic lending criteria, they will be automatically approved for a loan.

3. Faxless payday loans are the newest form of payday loans which make it possible to get cash without any paperwork submissions. Usually, this type of loans deals with online payday loans. All the borrower needs to do is to fill an online application, wait for it to be approved and have the money deposited into their checking account. Usually, the whole process takes no longer than 24-48 hours.

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