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A payday loan is a short-term loan for a small amount of money (usually up to $500) often perceived as a new method of acquiring consumer debt. Payday loan providers are sometimes compared unfavorably to loansharks, but in most states the former are legal. The loan is given in cash and paid back via electronic withdrawal from the debtor's checking account.
Payday loans have been criticized for their excessive (300% and more) interest rates. Those who take payday loans are often perceived as lower-middle-class "working poor" who see few options other than such loans. Like credit card companies, payday loaners have been argued to be taking advantage of the poor and those who do not understand the time value of money.
Defenders of high interest rates on payday loans note that, due to processing costs on such small loan amounts, conventional interest rates would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would only generate 38 cents of interest, which would fail to match loan processing fees. Also, the interest on payday loans is less than the costs associated with bounced checks or late credit card payments.
Most mainstream banks have not entered the payday loan business.
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