A deferred presentment transaction, also known as a payday loan, is a short-term loan where a borrower writes a post-dated check to a lender. The lender holds the check until a predetermined date, usually the borrower’s next payday. The borrower receives cash upfront, less the lender’s fees.
According to the Consumer Financial Protection Bureau a payday loan is typically $500 or less.
How Does a Deferred Presentment Transaction Work?
In a deferred presentment transaction, the borrower writes a check for the amount they wish to borrow plus a fee. The lender holds onto this check and gives the borrower the cash amount. On the agreed-upon date, the lender deposits the check. If the borrower’s account has sufficient funds, the check is cleared. If not, the borrower may face additional fees from both the lender and their bank.
What are the Fees Associated with Deferred Presentment Transactions?
Fees for deferred presentment transactions can vary widely depending on the lender and the state regulations. However, they are typically quite high compared to other types of loans. According to the Consumer Financial Protection Bureau, fees can range from $10 to $30 for every $100 borrowed. This means that a two-week loan with a fee of $15 per $100 borrowed equates to an annual percentage rate (APR) of nearly 400%.
What are the Risks of Deferred Presentment Transactions?
While deferred presentment transactions can provide quick cash in an emergency, they also come with significant risks. The high fees and short repayment period can trap borrowers in a cycle of debt. If a borrower cannot repay the loan on time, they may need to take out another loan, incurring more fees.
According to the Center for Responsible Lending, 76% of payday loans are taken out within two weeks of repaying a previous payday loan.
Are There Alternatives to Deferred Presentment Transactions?
Yes, there are alternatives to deferred presentment transactions. These include:
- Personal loans from a bank or credit union
- Credit card cash advances
- Payment plans with creditors
- Emergency assistance programs
Each of these alternatives has its own pros and cons, and it’s important for borrowers to understand these before making a decision.
In conclusion, a deferred presentment transaction is a type of short-term loan that can provide quick cash but comes with high fees and significant risks. It’s crucial for borrowers to understand these risks and consider alternatives before deciding to take out a payday loan.
