How Payday Loans Work

How Payday Loans Work


Consumers in need of quick cash may find that their borrowing options are limited if available at all. In recent years payday loans have provided funding for cash-strapped consumers, with millions of loans successfully issued since. Payday loans are easy to obtain and work straightforwardly.


Also known as a cash advance loan, payday loans are designed to give consumers temporary financial relief until their next pay day. Loans are generally small, unsecured and are paid back within two weeks.

Most payday lenders do not require customers to claim the reason for borrowing. However, many people use payday services to cover the rent, make a car payment, buy groceries or handle an emergency.

Loan Terms

Payday loans usually are offered for seven to 14 days with the possibility of loan renewal also offered. Loans are small and include a fee representing the interest rate charged. For instance, a $300 loan may incur a $30 fee. At the end of the loan term the borrower will pay the lender $330 to satisfy the loan.


The Internet plays an important role in making payday loans easy to access and widely available. Lenders are available online and applications are usually submitted online as well. Some lenders also make loans available through local financial centers.

Lenders ask borrowers for certain information, including their name, address, Social Security Number and checking account information. Not all lenders require borrowers to hold a job as a pension or Social Security check are recognized as income. Fill out the application, sign the contract and await the lender’s response.


Payday lenders make a point to review loan applications quickly and render a decision as soon as possible. If your application is approved you can expect funds deposited into your checking account no later than the next business day.


On the day that your payday loan is due, your lender will charge your account to recover the loan amount plus fees. It is important to have sufficient funds on hand to make this payment.

If you are unable to make payment on the due date, you can contact your lender and request a loan extension. Keep in mind that additional fees will likely apply.


Payday loans fall under the Truth in Lending Act (TILA), therefore your rights as a consumer are protected. State laws vary and may limit the amount of interest charged. You should know that if you default on a payday loan, the lender can report this information to the three credit bureaus. Your credit score can suffer as a result.

Consumers that habitually take out payday loans should seek the advice of a credit counselor. Payday loans are emergency loans and should not be used more frequently than necessary.

Further Reading

Where to Borrow Money Quickly and Easily

About Personal Cash Advance Loans

What You Need to Know About Personal Loans


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Categories: Loans

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".