Cash Advance Facts
How Cash Advances WorkCash advance loans, offer borrowers the opportunity to obtain quick cash without putting down collateral or even going through an in-depth credit approval process. Typically, a borrower exchanges a personal check for a set amount of money from the lender. The lender holds the personal check until the end of the loan term, typically two to four weeks. While most lenders simply cash the post-dated personal checks to satisfy the loan, many ask the borrowers to allow electronic access to their checking accounts, further simplifying the process.
At the end of the loan term, the borrower can either pay off the loan in person and void the check, allow borrower to deposit the check, or roll over the loan to extend the loan term. Before entering into a cash advance, the law requires that the loan terms and conditions be explained to you.
Cash Advance Terms
The amount of a typical cash advance ranges from one-hundred to one-thousand dollars. The laws governing cash advance loans vary widely from state to state. Because of this, both the amount of a cash advance loan and the minimum and maximum loan terms are subject to change, depending on the borrower's state of residence. A standard cash advance term is 2 weeks. The average APR on a cash advance loan is 470 percent. The fees for a cash advance are generally between 15 and 30 dollars for each hundred borrowed. For a two-week loan, this amounts to an interest rate of between 390 and 680 percent. Of course, the shorter the loan term the greater the APR.
Cost Compared with Other Cash Loans
Other types of loans tend to be a bit less expensive than a cash advance. The average charge for a 300 dollar cash advance from a credit card is 13.99 per month, amounting to almost 57 percent. However, a typical cash advance from a short-term "payday" type loan is 17.50 for each hundred, or 105 dollars if it's rolled-over a single time. This amounts to 426 percent APR.
Requirements to Get a Cash Advance
Many people prefer a cash advance to other short-term loan products because they are so easy to obtain. There is no credit check involved, and very few questions to answer. The only thing that most lenders require is a valid bank account, a steady income, and valid forms of identification.
Cash Advance Industry
Cash advances are most typically issued through the Internet, pawnshops, and check-cashing stores as well. Cash advances are also occasionally issued by rent-to-own companies, too. Many cash advance companies use direct-mail campaigns to entice prospective customers to obtain a cash advance by calling a toll-free number.
CLR reports that, in 2006, there were approximately 25,000 cash advance lenders in the United States. These lenders issued over twenty-eight billion dollars in cash advances, and the fees involved totaled nearly 5 billion dollars.
Legal Status for Cash Advance Lending
In 2006, thirty-six states and the District of Columbia, there are laws on the books that regulate the payday lending industry. Michigan enacted its laws on June 1st, 2006. Lenders are permitted to issue cash advances in two other states, as well. Twelve states and two US territories do not have any laws authorizing cash advance lending. In Maine, for example, supervised lenders can use a fee structure that allows payday lending on a limited basis, but Maine has no industry legislation at this time. To find out more about the legal status of cash advance lending in Maine, click on LEGAL STATUS.
Tactics to Evade State Small Loan and Usury Laws
In states where cash advances are not permitted or are very heavily regulated, some lenders disguise their loans. One of these tactics includes offering a service such as Internet access with rebates. Texas, for one, has many cash advance lenders that call themselves "Credit Service Organizations." These are unregulated, and allow companies to evade the limits set by the Texas Finance Commission and the small loan laws. The FDIC is working to preclude around a dozen banks from "renting" banking charters in order to help cash advance lenders do business where it is illegal, or impractical, for them to do so.
Debt Traps
Because cash advances have a high cost, short loan term, and strict consequences for non-repayment of the loan, lenders can trap borrowers into a repeat cycle. The average number of loans that consumers make with the same lender usually range in number: from eight to thirteen. In one state, nearly 60 percent of people who borrowed from cash advance lenders take out a new loan the same day.
Risk and Cost of Checks for Loans
When a person obtains a cash advance, the checks written do not have funds to back them. When these checks bounce, the resulting fees from the banks and lenders can be extreme. In addition, bounced checks negatively affect the customer's credit rating. Banks will often close an account if there are a large number of returned checks drawn against the account, especially if the bounced checks were for a cash advance.
Coercive Collection Tactics from Check Holding
Some lenders have come under fire recently for using allegedly coercive tactics to secure repayment. They threaten criminal penalties if the borrower does not pay the loan back in a timely fashion. They have even been known to threaten military personnel with court martial and criminal charges if they default on their loan. While it is true that most states allow a lender to sue in civil court, the majority do not file criminal charges for simple cases of non-repayment.
Internet Cash Advance Lending
While using cash advance services are risky at the best of times, obtaining a cash advance from an Internet lender only adds to the risk involved. Security breaches, fraud, and predatory lending practices are far more likely to be encountered in an online environment. The money borrowed is directly deposited into the borrower's bank account. At the end of the loan term, the principal plus any interest and fees are also directly withdrawn from the borrower's account.