W!SE Financial Literacy Certification Practice Test

A payday loan is primarily defined as a short-term loan that is typically based on the borrower's paycheck or expected income. The borrower writes a check or provides permission to the lender to withdraw money from their bank account in exchange for receiving cash upfront. This type of loan is designed to cover immediate expenses, with the expectation that the borrower will repay it when they receive their next paycheck.

The characteristics of payday loans often include high-interest rates and fees, which can result in the borrower owing a significant amount by the time they are due for repayment. This is critical as it reflects the risks involved in taking out such loans, especially for individuals who might struggle to repay them on time.

While collateral and repayment terms can vary among lenders and types of loans, payday loans generally do not require collateral, nor are they characterized by a lack of repayment terms. Instead, they are explicitly set up to coincide with a borrower's income cycle, which encapsulates the essence of their repayment structure.