Fourteen days after your payday loan is approved, the loan is due. That means that you now owe back the full amount of the money that the store/company lent you. So now the store will attempt to cash your check you wrote in the amount of the money they loaned you. One of two things will happen.
- If your check clears you have repaid the loan.
- If your check bounces, you incur bounced check fees from the payday loan company AND insufficient funds fees from your bank. On top of those fees you still have the outstanding loan to pay. Now if you don't want to default on the loan, you will have to pay to extend the loan another 14 days.
Payday loan companies have been under attack by the media and lawmakers in part because the stores accept your postdated check knowing full well that you do not have sufficient funds in the account to cover the loan amount. (They know this because if you did have the funds to cover the check you wouldn't need the loan in the first place.)
Unless you deposit enough money in the account to cover the check, they know that most likely when they attempt to cash the check to recover the loan, the check will bounce. Now they can charge a bounced check fee in addition to your loan fee, and interest fee. The average bounced check fee for payday loan companies is nearly $22.
If you are unable to pay the loan, the company will threaten criminal prosecution. The company can use the post-dated check that you wrote, as proof that you have written a bad check. Often these companies will attempt to cash your check several times in order to increase the fees they can collect from you for bouncing a check.
Because these stores know that most customers are hard-pressed to pay off the entire loan by the 14 day loan deadline and still be able to pay their other regular living expenses, most stores will now automatically extend/renew loans every pay period (or 14 days).
Let's take a look at how quickly the fees and interest add up when you automatically extend a loan:
Say that you take out a payday advance loan for $300 at a fee of $18.25 per $100 loaned. That would mean you would be required to pay $54.75 for your $300 loan. If you are unable to pay it off by the loan due date 14 days later and the company roll it over you will pay another $54.75 for the same $300 loan. It will continue that way every two weeks and if you aren't able to pay the loan off after 1 year, you will owe $2,737.50 on a $300 loan!
