Payday Loan

Definition

A payday loan is a form of short-term borrowing where a lender provides high-interest credit based on the borrower's income. Typically, the principal is a portion of the borrower's next paycheck. This type of loan is also known as a cash advance loan or check advance loan.

Origin

Payday loans originated in the United States in the 1990s, evolving with economic fluctuations and the increasing consumer demand for quick cash. Initially, this loan type was designed to help those needing emergency funds before their payday.

Categories and Features

Payday loans are mainly categorized into in-store loans and online loans. In-store loans require borrowers to visit the lending institution in person, while online loans can be applied for over the internet. The features of payday loans include fast approval, no credit checks, but extremely high interest rates, often with an annual percentage rate (APR) of 400% or more.

Case Studies

Case Study 1: Advance America in the United States is one of the major providers of payday loans, offering quick cash loan services through its nationwide branches. Case Study 2: Wonga in the UK was a leader in online payday loans, although its high-interest policies eventually led to regulatory intervention and the company's collapse.

Common Issues

Common issues for investors include high interest rates and debt traps. Due to the high interest rates of payday loans, borrowers may fall into a cycle of borrowing new loans to pay off old ones. Additionally, many people mistakenly believe payday loans are a long-term solution, whereas they are intended for short-term emergency needs only.