What is a payday loan and how does it work


Many of us have experienced a situation where our financial conditions forced us either to seek a loan so that we could purchase a new asset or to pay the necessary bills. Some of you may borrow money from your friends and family, but this is not always a viable option if you want to borrow a significantly large amount and may have to approach the bank eventually. There are several types of loans that are available, and some are short-term such as payday loans. If you are truly desperate for cash, then you may be tempted to get a payday loan since it will immediately help to solve some of your financial woes, but there are several things that you need to be aware of before you approach the bank. These loans have a high cost and may tough for you to repay since they usually charge APRs, which can reach triple digits, and you usually have to pay them back within two weeks. Hence, it is wise that you know well in advance, what to expect from a payday loan before you go and apply for one.

  1. How a payday loan works:

A Payday loan operates quite differently compared to personal and various other types of loans. The features of a payday loan also vary from state to states such as the maximum amount that you can borrow and the lender’s fee while some states ban payday loans too. After your application is approved, you will receive the money through cash or cheque, which you have to return within two weeks. The reason why people hesitate getting payday loans is the financial charges that come with it. Since the repayment period is short, the APR figure can be high, which will prove troublesome for you to manage eventually causing more harm than good in the long run if you cannot make timely payments. Despite this, many people still take payday loans every year, usually, since they do not have the credit ratings to get better loans, or they are not aware of the other types of loans that are available. Payday loans are also very easy to secure due to the leniency in the requirements, and many of them do not even look at your credit score.

  1. The amount that can be borrowed:

As mentioned earlier, the amount of money that you borrow will vary from state to state. For two weeks, the average amount that you can borrow is about $350. However, the amount can range between $50, to $1000, which is dependent upon the state’s laws where you primarily reside. According to sources, there are 32 states where there is a limit on the loan amount that you can borrow while some states such as Wisconsin and Utah do not have such a limit, which allows you to borrow a high amount too. Other states such as Nevada alongside other countries such as New Mexico also have a limit where you can borrow only up to 25% of the monthly income of the borrower, which ensures that he can repay the loaned amount once he gets his monthly paycheck.

  1. The cost involved in a Payday loan:

 The costs, which are attached with a payday loan usually, vary from state to state and are the primary reason why these loans become expensive to repay. The amount usually ranges from $10 to $30 for every $100 that you borrowed, which makes it quite a hefty amount if you borrowed money in the thousands. For example, if you have to pay $15 for every hundred dollars that you borrow, the interest rate is fixed at 15%, which means that your APR will likely be at 400% if you have to pay back the amount in two weeks. Although the amount is quite normal when payday loans are concerned, it can also rise higher as well. When compared to other tools such as credit cards, the interest that you have to pay will typically be around 7%.

  1. How to repay a payday loan:

A payday loan is usually repaid by a solitary payment when you receive your next salary. However, it is better to ask the lender for his specific terms before you decide to agree for the loan since it can vary from lender to lender. There are several methods that you can choose to repay the loan, such as a postdated check when you apply or giving the authority to your lender to directly debit from your bank account. You can also pay him back in any other form of credit, which suits you. In the scenario where you fail to pay the loan in time, the lender will be able to electronically deduct the amount from your bank account. Unfortunately, the majority of the people are unable to clear their debts in time and have to borrow the amount again.

  1. Rollover loan:

I am sure that you were interested in what would happen if you default on your loan. Some payday lenders will also provide you with the service of a rollover or a renew feature if they are permitted by the state. This may be an advantage for you since it will allow the lender to roll over the old balance into a new loan or he will renew the current loan again. This process will allow you to pay back the loan at your comfort, and you will only have to pay an additional fee to have the loan extended. However, an important thing to remember is that you may end up paying a huge sum as a registration fee if the process is repeated consistently and you are a regular defaulter on loan.


No doubt taking a payday loan will help you in an emergency where you in desperate need of money. Unfortunately, there is a huge risk as far as these loans are concerned since they have a high APR and if you cannot pay it back in time, you may be trapped in a vicious debt cycle. These things should be taken into account when you are taking this option so it is better that you can pay the money back by your next paycheck when getting this loan. If you feel that you will struggle to repay the loan, you can go to other options such as asking your friends and family even if it is uncomfortable, but it is still a better option than being deep into debt.

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