How Do Payday Loans Work?

how do payday loans work pay day loan

Last year 40 percent of adults aged 18-37 used payday loans or other similar ways of getting quick cash. Payday loans are a simple way to get hold of badly needed cash if you need it before your next paycheck comes in.

How do payday loans work, exactly? Can anybody take one out, and if so, how much can you borrow?

Read on to learn more about payday loans.


What Is a Payday Loan?

Payday loans are short-term cash loans that are borrowed against an upcoming paycheck. 

The idea is that you borrow the money, and as soon as you have received your paycheck, the loan and any interest is paid off. Since the loan is short-term, you should not have accrued an enormous amount of interest, even with the high interest rates that usually come with this type of loan.


How Do Payday Loans Work?

Different lenders will have different systems in place for recouping the balance of the loan plus any fees and interest.

One of the most common methods is to get the borrower to write a check for the amount that you are borrowing plus any fees and interest. Once you have been paid, the lender can then cash the check to recoup their money. 

Some lenders require you to authorize them to take an electronic payment from your account once your paycheck arrives, or you may be asked to make the payment via a prepaid card. Whatever method you use, the principle remains the same.

If you have other outgoings and don't have enough cash left over from your paycheck to cover the loan, it may be possible to extend it. Obviously, the amount of interest will increase in this case.


Who Is Eligible for Payday Loans?

Pretty much anyone can take out a payday loan, as long as they meet the lender's criteria.

You'll usually need an active bank account, some kind of proof of your income (so that they know you'll be getting a paycheck soon), and some identification. Since the loan is based on you having an upcoming paycheck, there aren't usually any credit checks, so you can take out a payday loan even if your credit rating is poor.

Even if you're self-employed, it's still possible to get a payday loan. Check out our Frugal Finance Loan section for more information. 


How Much Can I Borrow?

How much you can borrow will depend on several factors such as the lender you choose, your income, and the size of the interest and fees.

Don't expect to be able to borrow $10,000 if you're only getting $1,000 in your next paycheck. Most loans are usually around the $500 mark, but you may be able to borrow more depending on your circumstances.

Don't forget, the more that you borrow, the more interest you'll need to pay on your payday loan.


Are Payday Loans Right for You?

How do payday loans work? Now you know more about the payday loan option pros and cons.

Whether or not a payday loan is the right choice depends on your situation. You need to be sure that you can repay the payday loan promptly without incurring too much interest. 

New Frugal Finance Blog Posts & Articles