How do Payday Loans Work

How do payday loans work? If you need cash right now and thinking of getting this short-term loan, you better know how it really works before diving in.

Payday loans can help you during the rough times, but it can harm you in the long run if you’re not very careful. It can even trap you in the depth of debts.

What You Need to Know:


About 12 million Americans take the loan every year based on the Pew Charitable Trusts. People spend $9 billion alone for the fees.

People can take the loan in 36 states. Other states ban the high APR by capping the rates.

It has three main features:

  1. You can borrow a few dollars.
  2. You must repay it within two weeks.
  3. Lenders have access to your bank account.

Do you know that a borrower is in debt for 5 months each year when they borrow the loan? A lender has an average fee of $55 for every two weeks. It is paid in the borrower’s next paycheck.

Even though the loan is promoted useful in times of emergency or unexpected events, 7 in 10 people have used it for paying utility bills and rent.

Borrowers pay more fees than they get the credit

The annual percentage rate of the loan is 400 percent. If you don’t pay it on the due date, it can rise up to 521 percent, according to the Consumer Financial Protection Bureau.

Every $100 loan has an interest rate of $15 or $20. If you can’t repay it within two weeks, you’ll earn more interest and fees that make it, even more, harder to repay it.

How it Works:

Today, there are a lot of store-front as well as online lenders that provide instant cash to borrowers. With minimal requirements, you can get approved fast and easy.

It works differently to any other types of personal loans, credit cards, and consumer loans. Different states have a different set of regulations. If you are planning to borrow, you must know them first to avoid bigger problems.

Also, depending on where you live, the amount that you can borrow also differs. Some states have laws that limit the loans approved to borrowers. There are also places where it is prohibited.

You can go to any reputable lender in your area to fill out the application form. You must bring and submit all the requirements, including your identification, bank information, and proof of income.

The loan amounts to $100 up to $1, 500 depending on your state. Once approved, you may get the cash or check right away or wait up to 48 hours. They may also deposit it to your bank account.

You have to pay it plus the fees and interest within two weeks or during your next payday. Most of the time, lenders have access to your checking account.

They can also collect the payment through a postdated check. If you fail to pay it on the due date, lenders can withdraw the amount on your bank account.

Payday Loans are Unaffordable

Sadly, the fact is that the short-term loan is expensive to borrowers. On average, one borrower must pay $430 within two weeks.

If they are living paycheck to paycheck, they cannot afford to repay it because they have other utilities to pay aside from other expenses. What happens is that they rollover the loan by paying the loaned amount, interest plus the new fees.

Surveys revealed that most borrowers find it hard to repay. About 80 percent of the loans were rollover while 20 percent was a default.

All lenders don’t conduct a credit check on your financial status. If you are able to pay it on your due date, it cannot be used to improve your credit score. It also doesn’t appear in your credit history.

However, it can affect if you fail to comply with the payment. Once the lender sold your loan to a collection agency,  your records would be seen on credit collecting agencies that can ruin your credit score. 

Payday loans are a quick and hassle-free way to get instant cash when you need it most. However, you must know that paying is a big responsibility to take.

If you are not ready, don’t attempt to apply for the loan. There are other options that you can use to solve your present financial dilemma.


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