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How Do Payday Loans Work?

How Do Payday Loans Work?

Ever wonder how payday loans work? Bills and other expenses can arise without warning. If your car breaks down, paying a mechanic for the repairs becomes unavoidable. What if you don’t own a credit card and lack liquid cash? People living paycheck-to-paycheck without any available revolving credit may be in a tough spot. So, they turn to a payday loan as a source of short-term financing.

A common question comes up here. “What is a payday loan?”

A Basic Definition for a Payday Loan

 How do payday loans work? A payday loan refers to a relatively small amount of money secured by a future paycheck. The amount of the loan would be based on how much money the borrower receives on the paycheck. A small loan in the range of $300 to $400 reflects the common amounts paid. The amount of a payday loan can be much higher. $750 to $1,000 aren’t out of the question depending on the state. Under the law, states set maximum amounts for these loans.

State maximums aside, the lender looks at the actual amount of money a borrower receives on his/her weekly paycheck when determining the loan amount. Lenders won’t likely issue a loan beyond what the borrower can pay back.

Payday Loans: Applying and Receiving

how do payday loans workThe process of applying for a payday loan can be done online or in person. Either way, some basic information becomes necessary in order to facilitate the loan. First, the borrower must provide proof of employment. A copy of a previous pay stub may be required. Sometimes, the lender requires the applicant be employed at the job for at least two weeks.

Also, the borrower must present a signed check or sign off on an electronic funds transfer agreement. Essentially, the borrower provides the means to pay back the loan at the time the loan is approved. Usually, the borrower has two weeks to a month to pay off the debt.

At a brick-and-mortar payday loan business, the loan will be issued in cash on the spot. Online loans, however, require at least 24 hours to deposit into a checking account. Certain online loans can be picked up in person at a set location. Generally, online payday loans are deposited into checking accounts.

Be aware approvals for a payday loan aren’t automatic. A lender can deny the loan when you already have outstanding payday loans out, previously bounced checks, don’t make enough income, or just appear to be too much of a credit risk.

Costs of a Payday Loan

Asking “What is a payday loan?” isn’t enough. Borrowers must ask how much a payday loan costs. In light of the interest and fees, ask if the loan is worth the expense. Payday loans do come with high interest rates. Often, payday loans reflect last chance lending for those who can’t procure a loan from another source.

With payday loans, a borrower may pay 15% on every $100 borrowed on a two-week deal. Failure to pay the loan back on time leads to more interest and significant penalties. Failure to pay in full usually comes with collection actions and negative reports to the credit bureau. Defaulting on a payday loan could lead to a lawsuit and serious default marks reflected on a credit score.

Borrowers capable of acquiring a personal loan or other less-costly lending option can avoid high-interest payday loans. Not everyone finds him/herself in such a position though. Payday loans represent the only borrowing options available to them. Even with high interest, the last chance nature of these loans make them worthwhile. Looking for cheaper short-term loan options makes sense. Finding a short-term lender willing to approve a standard personal loan, however, could be difficult.



  • James Medley

    James is the content creator & SEO Administrator for the Naked.Media marketing agency. “Focus more on your desire than on your doubt, and the dream will take care of itself.” — Mark Twain

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