by M. Lee

Created on: February 18, 2010

What is a Payday Loan?

A payday loan is a small short-term loan intended for emergency use to cover expenses between a borrower’s paydays.  Often, these loans are also called cash advances, paycheck advances, payday advances, and paycheck loans among other very similar terms.  It should be noted that while payday loans are often referred to as cash advances, these are not the same as credit card cash advances in any way.

How a Payday Loan Works

The basic principle behind a payday loan is quite simple.  A borrower provides a personal check to be held for future deposit (or electronic access to that checking account) in exchange for immediate funding.  With traditional payday loans, the customer writes out a check for the principle amount, which is the amount of cash they receive, plus the loan fee or finance charge.  The check will be cashed or electronically deposited on the customer's payday in order to settle the debt. 

Typically, the finance charge and the borrowed amount must be paid all at once, on the customer’s payday.  In payday loan stores, customers may provide the cash payment or allow the store to cash their check.  If they choose not to pay the loan in full, they may roll it over until their next pay period by paying the finance charge only.  With online payday loans, this idea is the same except both funding and payment are done electronically through the ACH system or via bank wires.

Requirements for Borrowers

Though individual payday lenders will vary among their requirements for approval, very little is needed in order to qualify for a payday loan in general.  Typically, payday loans require that the borrower be at least 18 years of age, have an open bank account (usually a checking account though some lenders will deposit into savings accounts), and a job.  Payday lenders do not run credit checks on their potential customers.  Some payday lenders require a packet of information while others simply allow their customers to apply in their store or online.

The Terms and Cost of Payday Loans

The amount customers may borrow for payday loans really depends on the payday loan company but typically the amounts range from $100 to $1,500 and the average payday loan term is about two weeks to correspond with customers’ paydays.  When it comes to annual interest, or APR, most payday loans come in around 400% on average.  Remember, the finance charges range from $10

• 1
• 2
• Next Page >>