If you’re living paycheck to paycheck like most people what happens when you need money for sudden expenses? In this article we’re discussing payday loans and how do payday loans work?

Payday loans are short-term cash loans based on the borrower’s check held for future deposit or on electronic access to the borrower’s bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.

Lenders hold the checks until the borrower’s next payday when loans and the finance charge must be paid in one lump sum. To pay a loan, borrowers can redeem the check by paying the loan with cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period. Some people might ask “how do payday loans work?” Some payday lenders also offer longer-term payday installment loans and request authorization to electronically withdraw multiple payments from the borrower’s bank account, typically due on each pay date. The average loan term is about two weeks. Loans typically cost 400% annual interest (APR) or more. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter-term loans have even higher APRs. Rates are higher in states that do not cap the maximum cost.

Requirements to Get a Payday Loan

All a consumer needs to get a payday loan is an open bank account in relatively good standing, a steady source of income, and identification. Lenders do not conduct a full credit check or ask questions to determine if a borrower can afford to repay the loan. Since loans are made based on the lender’s ability to collect, not the borrower’s ability to repay while meeting other financial obligations, payday loans create a debt trap.

80 percent of payday borrowers that were tracked rolled over or re-borrowed loans within 30 days. Borrowers default on one in five payday loans. Online borrowers fare worse. More than half of all online payday installment loan sequences default.

Payday Lenders

Payday loans are made by payday loan stores, or at stores that sell other financial services, such as check cashing, title loans, rent-to-own, and pawn, depending on state licensing requirements. Loans are made via websites and mobile devices. 

It’s easy to find lenders who offer online payday advances. To qualify for an online payday advance, lenders’ requirements may include U.S. citizenship or permanent resident status and that the borrower is at least 18 years old.

Here is some of the information you may need to provide during the application process.

• Your name, address, and contact information.
• Your employment and income information, including when your next payday is. You may need to provide documents verifying your income.
• Your checking account, including account numbers.

These online loans can often be approved quickly — sometimes even without a credit check — and funds may be available by the next business day through direct deposit into your bank account.

When you’re in immediate need of funds, payday loans come to your rescue. If you are planning to get one, you need to first understand how do payday loans work and then get on with the process. There are so many reasons why individuals opt for payday loans. You may easily be approved for these loans and even receive the funds the next business day if not the same day.