Federal rules do not define "payday loan" by name; the corresponding federal term is a "covered short-term loan," for which, under the CFPB's Payday Lending Rule, "the consumer is required to repay substantially the entire amount of the loan within 45 days of consummation."
A payday loan is a short-term loan structured to be repaid in one payment on the customer's next payday, commonly within two to four weeks. The customer typically provides a postdated check or authorization for an automatic withdrawal, and the lender charges a flat fee for the advance. If the customer cannot repay the full amount on the due date, the loan may be renewed, extended, or rolled over by paying an additional fee, which is known as a rollover. Payday loans are regulated differently from state to state, and some jurisdictions limit or prohibit them. An installment loan, which spreads repayment over a set schedule, is a commonly cited alternative.
A typical payday loan is small and due in full on the borrower's next payday. To get one, the borrower commonly writes a post-dated check or authorizes the lender to withdraw the full amount electronically on the due date. The cost is usually a flat fee for each amount borrowed rather than interest spread over a schedule of payments.
Because the whole balance is due at once, a borrower who cannot repay may renew or roll the loan over by paying another fee, where state law allows it. Rules differ widely by state: some cap fees or the number of renewals, some require an extended payment plan to be offered, and some do not allow payday lending at all.
Federal rules also shape how payday loans are collected electronically. Under the Consumer Financial Protection Bureau's payday lending rule, a lender whose attempts to withdraw a payment have failed twice in a row generally cannot try again without a new authorization from the consumer. The limit is meant to stop repeated withdrawal attempts from piling returned-payment charges onto a borrower's bank account.
An example
A worker is short before rent is due and considers a payday advance. The lender asks for a post-dated check covering the amount borrowed plus a fee, dated for the next payday. On that date the full amount is due in one payment. If the worker cannot cover it, the lender may offer to extend the loan for another fee, and the original balance is still owed on the new date.
Common misconceptions
Myth: Any small loan is a payday loan.
In fact: What defines a payday loan is the single payment due on the next payday. Small installment loans repaid over a schedule of payments are a different structure.
Myth: Rolling a payday loan over pays it down.
In fact: A rollover fee extends the due date. Unless part of the principal is also paid, the balance owed stays the same.
Myth: Payday loans are regulated the same way everywhere.
In fact: State law decides whether payday loans are allowed and on what terms, so the rules in one state can look very different from those in another.
What to check
- Whether the balance is due in one payment or in installments.
- The fee in dollars and when it is due.
- What happens if the loan cannot be repaid on the due date.
- Whether state law requires an extended payment plan to be offered.
How this applies at Desert Rock Capital
Desert Rock Capital is a licensed Utah lender, and its loans are installment loans rather than single-payment loans. Each loan, from $100 to $3,000, is repaid in fixed biweekly payments with no balloon payment. We never hold a post-dated check and never take pre-authorized debits; customers make voluntary payments toward their loan account.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.