How does a payday loan work

How Does a Payday Day Loan Work?

Payday loans, also commonly referred to as cash advance loans, are small short-term loans that typically range from $50-$1000, which are charged high interest rate and are repaid using the borrower's next paycheck (hence the term "payday"). Many people use payday loans as a way to receive their paycheck in advance when it is needed for bills or unexpected expenses. The following information discusses the pros and cons of payday loans, as well as describing the process of applying for and repaying one.

Pros and Cons of Payday Loans

• Pros

Payday loans are often used by people with bad credit, as the lender bases the loan decision on the applicants income rather than their credit score or history. These loans can be applied for in less than a half an hour over the phone or online. Approval usually occurs immediately after the application process, and the funds can be received in cash or via direct bank deposit the same day. Applying for a payday loan is a discreet, secure and simple process, and there are no upfront costs involved.

• Cons

On the other hand, payday loans come with some of the highest interest rates amongst any loan type. Many lenders also charge exuberant late fees when the loans are not paid on time. Because of these high fees and interest rates, payday loans can create a significant amount of debt, especially when they are not repaid within the designated time period.

The Payday Loan Process

Before approving an applicant for a payday loan, a lender will usually request a copy of their last 2 pay check stubs, which will provide an indication of how much money the applicant can safely borrow and repay. Upon approval, the lender will go over the contract terms with the borrower, showing them how much money will need to be repaid, by which date, and what the consequences would be for not repaying the loan. Most lenders will require the borrower to write a postdated check that covers the amount of the loan, which can be cashed on the loan's repayment date.

What Happens if You Can't Repay It?

If the check does not clear then the loan is extended, or "rolled over". Rather than accumulating interest like a normal loan, payday loans have a set fee that must be added to the to the postdated check .Each time the loan is rolled over, that set fee is added to the total amount due. For example, a payday loan of $150 for 2 weeks may have a set fee of $20 (meaning the total amount of the postdated check would be $170), however if the loan is rolled over for another two weeks, then an additional $20 is added to the interest. In comparison to other loan types, this is extremely high interest, as just 3 rollovers on the aforementioned loan would amount to $80 in interest on a $150 loan!