A payday advance loan (PAL) is a short-term, high-interest loan designed to bridge the borrower's financial gap until their next paycheck. These loans often have extremely high annual percentage rates (APRs), making them an expensive form of credit.
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Payday advance loans are typically due in full on the borrower's next payday, usually within two weeks.
Lenders often charge a flat fee per borrowed amount, which can translate to APRs exceeding 400%.
Many borrowers fall into a cycle of debt due to the high costs and short repayment period associated with PALs.
States regulate payday loans differently; some states cap interest rates or ban them altogether.
The effective interest rate for PALs can be significantly higher than the stated rate due to fees and the short repayment term.
Review Questions
What is the typical repayment period for a payday advance loan?
How do lenders typically express the cost of borrowing a payday advance loan?
Why might borrowers find themselves in a cycle of debt with payday advance loans?
Related terms
Annual Percentage Rate (APR): The annualized cost of credit expressed as a percentage, including interest and fees.
Time Value of Money (TVM): A financial concept that money available today is worth more than the same amount in the future due to its earning potential.
Effective Annual Rate (EAR): The real return on an investment or real cost of a loan when compounding occurs more frequently than once per year.