How payday loans work
Payday loans are available in about three dozen states, with varying fees, regulations and maximum amounts that range up to $1,000.
Borrowers must have a checking account, fill out an application and present a driver's license or other official ID. They must also submit proof of employment, such as a pay stub, and postdate a personal check to their next payday, typically two weeks.
The lender agrees to hold the check until the due date. At that point, borrowers have three options:
Do nothing and allow the check to be deposited by the lender; return with cash to buy back the check; or "flip" the loan -- pay it off and immediately replace it with a new one. That incurs additional fees.
In California the maximum loan amount is $300, which translates to $255 in cash to the borrower after lenders deduct a fee of $15 per $100. That fee is a little over 17.6% of the $255 and works out to a 459% annual rate -- 17.6% multiplied by 26 two-week periods.
Source:: Latimes.com
