What Is a Payday Loan and How Do They Work? Understanding Short-Term Personal Loans

article image what is a payday loan and how do they work

Payday loans are short-term personal loans that are repaid within designated time frames

A payday loan is a small short-term personal loan that is repaid in accordance to the borrower’s pay days over a designated time frame. Payday loans are also sometimes referred to as pay advances, cash advances, and fast personal loans. Payday loans are rather common. In fact, millions of people use a payday loan each year. Today we will be answering some of your big questions regarding what payday loans are and how they work. We will cover how much a person can borrow with a payday loan and how much it will cost. We will look at the application process to get an understanding of what is required. We will cover all this and more. Here is your guide to everything payday loan. We even have a fun self-assessment quiz at the end.

Follow our helpful infographic below or skip to our Question and Answer Section or our Do I Need A Loan? self-assessment quiz. 

Payday loan infographic

Pick from the links below. 

What Is a payday loan?

A payday loan is a short-term personal loan that requires the applicant supply no collateral. They are called “payday loans” because they originated as loans that were designed to be short-term solutions between pay dates. Usually, people can borrow $200 – $1,000, but it depends on a few factors. Every payday lender is a little different. Most require their customers to have a source of income and a bank account.

Payday loans are used to pay emergency or unexpected expenses. Payday loans can cost more than other loan alternatives. However, the people that take out a payday loan rarely have a lot of other options. Payday lenders do not perform a hard credit check. No-credit-needed payday loans can help those who have bad credit or no credit.

Some recommendations when using payday loans include only borrowing what you need, paying it back on-time, and checking with other loan alternatives first. Remember, payday loans are recommended to only be used for unexpected or emergency expenses. 

How do payday loans work?  

Every loan provider is a little different. Some companies have physical payday loan stores near you. Other lenders offer online payday loans. For many cash advance companies, you either apply in-store or online. 

There are direct payday lenders and indirect payday lenders. When you work with a direct lender, you work with the same company throughout the entire process. When you work with an indirect lender, you will work with multiple different companies throughout the loan process. Direct lenders will process your application in-house. Indirect lenders will collect your personal information and then sell it to a bunch of different loan companies. Working with a direct lender can make things more convenient. It can also be safer since you do not have to worry as much about fraud.  

You will be asked a few questions in the application. You might be asked questions such as where your address is, or how old you are. Payday loan laws change state-by-state, so knowing that information is important. At Net Pay Advance, we require customers to be over 18, live in a state we are licensed to operate in, and to have a bank account open in their name for at least 30 days. During the application process, lenders will likely confirm your income and your checking account information. 

Many lenders will be able to provide approval or denial of your application relatively quickly. The lender will let you know how much money you are approved to borrow. The paperwork they send you for approval will also include the rates, terms, and due date.

If you accept the loan amount, you will usually see the funds within 1 – 2 business days. Electronic transfers usually take a business day to complete. Once you have the funds, you can use your payday loan as you see fit.

Payday loan due dates are determined by the borrower’s pay cycle, with the repayment period varying based on the product type. This is typically two weeks or a month away. Every lender is different. If the lender has stores, you will be required to return to the store to pay on the due day. If not, the lender will run a check or withdrawal out of your account. They will charge the money owed. If you work with an online lender instead, they will initiate and electronic withdrawal. At Net Pay Advance, your payday loan will be due dependent upon the product type approved. Due date schedules are calculated based upon the borrower’s pay days.

How much money can I borrow with a payday loan? 

The max amount varies from company to company and state to state. Most states and companies have a max payday loan amount between $200 and $1,000. At Net Pay Advance, or loan max is based off state laws. We offer California payday loans, Texas loans, Kansas loans, Utah loans, Missouri loans, and Tennessee loans. Depending on your state, you can be eligible for $255 to $1200. In some states, you can take out a $500 payday loan online if that’s close to the amount you need.

The payday lender will determine how much you are approved for during the application process.  You may not be approved for the max amount. Payday lenders determine how much money you qualify for, based on certain variables. They look at your income, expenses, and payday lending history. These variables help them determine how much you will realistically be able to pay. If you are approved for more money than you need, we recommend only borrowing what you need.  

What do I need to apply for a payday loan?  

When you fill out a payday loan application, lenders will look for a few things. It depends on the company, but you will usually have to provide ID. You may be asked for proof of income or a recent pay stub. You will also be asked for your bank account information. Most companies want to make sure you are at least 18 years old, live in a state that they operate in, and that you have income. They usually want to make sure that you have a bank account in your name. For fraud purposes, they also want to check that the bank account has been active for more than 30 days. 

Even if all of this information is accurate, you might still be denied. Payday lenders are also checking how long you have been with your company. They are checking if you make enough money. This can be because your next paycheck would be less than the repayment amount, and ability to repay is a factor when approving an applicant. Additionally, there might be because of legislature that limits payday loans to a certain amount. Many companies may deny your application if you already have an outstanding payday loan. Being active-duty military may be another reason. There are federal laws in place that prevent active-duty military from getting certain loans. You might also be denied if you have recently filed bankruptcy or have had bounced checks.

Traditional lenders, that cater to individuals with higher credit scores, often run a hard credit check. A lot of people prefer payday loans because they believe it’s a “no-credit-check” loan. That’s not quite the case. A lot of payday lenders run a soft credit inquiry to check that you are who you say.

The good news though is a soft inquiry doesn’t impact your credit score, and it’s not visible to others that may check your credit.

With a payday lender’s soft credit check, your credit score isn’t considered in the application process. Most of these lenders offer payday loans with no credit needed. This means that you could be approved for a loan regardless of your credit! You might be approved for a loan, even if you have bad credit or no credit. 

How much does a payday loan cost?  

The cost of a payday loan varies. It is usually a flat fee around $15-25 for every $100 borrowed. This fee covers the cost of service. However, if the loan is not repaid on-time, there may be additional charges. At Net Pay Advance, we try to be very fair with our prices. If you’re based in Los Angeles or anywhere else in California, we charge $17.65 per $100 borrowed. You can learn more about our Texas rates and terms on this page

For some people, the initial flat fee is kind of high. When compared to other fees, like a late fee or bank overdraft fee, you will find that those tend to be higher. Most overdraft fees are around $33. Rest assured that many people prefer to save money by getting a payday loan instead of being charged an overdraft fee.

Some people also complain about the APR on payday loans being too high. APR rates are calculated on an annual basis. Since payday loans usually only have a month term, they cannot be compared to an annual, or yearly rate. 

Will payday loans affect my credit?  

It is not common. Since most payday lenders do not perform a hard credit pull, they do not report credit. Sometimes a payday loan with no hard credit check comes in handy. Most payday lenders will not report on-time payments to credit bureaus. So, it will not help or harm your score. 

One of the few exceptions to this is if you do not pay back the loan. If you default on a payday loan, the lender may turn your balance over to a third-party company. They may sell your balance to a collection agency, who may in-turn report it to the credit bureaus.

Learn more about How Payday Loans Affect Your Credit Score

What happens if I cannot repay a payday loan?  

Lenders will try to withdraw the money from your account. As we mentioned earlier, payday lender stores will try to run a check or withdrawal out of your account for the money owed. Online lenders will try to initiate an electronic withdrawal. If that does not work, both types of lenders may try to withdraw a smaller amount. They may break up the payment by trying to withdraw smaller amounts until it is paid back in full. If you miss your payment your loan will go to their collections department. Collections will call you and send you letters letting you know that you owe money on your loan. If a debt collector has to get involved, it may lead to a civil lawsuit. 

At Net Pay Advance, we know that sometimes life happens. We try to make the repayment process as easy as possible. Our customers can extend their due date three days for free! Extending your due date is easy. You can simply log into your account and set it up online. We also offer other solutions. If three days is not enough time, we also offer a payment plan. This breaks down the amount due into smaller chunks. Keeping with a payment plan guarantees that collection activity stops. At Net Pay Advance, we try to help our customers.

Learn more about What Happens if You Can’t Pay Back Your Online Payday Loan

Payday loan alternatives  

If you have alternatives that can help you in your time of need, we suggest that you look into them. 

Most people who get payday loans often get them because they do not have other loan or credit options. Check out some of these loan alternatives we have listed. If you do qualify for them, and want to go that route, we recommend checking them out first. 

Cutting costs and budgeting is one solution. Managing your personal finances can help in the future when it comes to unexpected expenses. For some people, this is not possible if they owe a lot of money in a short amount of time. 

If you have other bills that can wait, you could try delaying them instead. Use the funds for those bills towards the bills you have now. Try to find extra cash before those other bills are due. Even if you are only able to find a few extra dollars for those later bills, it can still help you save on a payday loan.

Ask a friend or family member to borrow money. Some will be comfortable with just giving you the cash and writing it off as a birthday or holiday gift. Others will be comfortable with offering you a loan. They may or may not charge you interest. Unfortunately, not everyone’s family has the funds necessary to cover the expense. They may also be uncomfortable with lending the money at all.

Apply for a traditional bank loan. These often allow you to borrow more and have smaller fees. Unfortunately, these lenders will check your credit. Their application is credit-based.

Use a credit card to make the payment. You will have at least a month to pay back your credit card. Even if you do miss the credit card payment, you might still save money. Sometimes the fees with a credit card can be less than the fees of a payday loan. If you do not currently have a credit card, this application process is also credit-based. 

Borrow money from an employer. If you have an unexpected expense, you may be able to ask your employer for an advance on your next paycheck. They will give you part, or all, of your next paycheck a little earlier. Understandably, not all employees are comfortable with telling their work that they are short on cash. Not all employers are comfortable with lending the money either.

You could also consider an auto title loan or a loan that requires collateral. So long as you pay back the loan on-time, everything will be fine. If you do not pay back your loan on time, the lender may take ownership of the item up for collateral. Not everyone is comfortable with the chance of losing their car or home. For many people, they need these items to live and keep their current job. 

Do I Need a Payday Loan? Self-Assessment Quiz  

Sometimes life happens and you need money fast. If you are considering a payday loan, this quiz may help! This quiz may point out other quick cash alternatives or alert you if you might qualify for a short-term loan with some companies. Of course, every lender is different, and your personal financial decisions are up to you. This fun self-assessment quiz is purely for entertainment purposes. 

Take the quiz here. 

Net Pay Advance is a licensed loan provider, locally owned and operated in Wichita, Kansas. Our No. 1 priority is helping you, the customer, by providing access to the cash you need and helping support financial independence goals with valuable, informational, and entertaining content. Stay up-to-date on our posts by following the Net Pay Advance Facebook, Instagram, and Twitter pages. Our organization is committed to transparency; learn more about our authors and editorial policy. The information provided within this blog is for educational purposes only and should not be construed as financial or legal advice. Please contact us if you have any questions.

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