What Is A Payday Loan And How Does It Work 2024? Detailed Answers

Have you ever had an unexpected bill and needed to access more money quickly? You may have thought of using a personal loan or credit card to cover the shortfall. But what if you don’t qualify for personal loans and don’t have a credit card? In that case, you might have considered payday loans instead. But what is a payday loan, and how can you apply for one?

Here’s all the information you need to know about payday loans. We’ll explain how payday loans work, how much you can borrow, and what happens if you don’t repay on time. We’ll also look at some payday loan alternatives that you could consider.

What Is A Payday Loan? 

A payday loan^[1] is a short-term loan for a relatively small amount, which you repay when you receive your next paycheck. You don’t usually need a good credit score, so they are an attractive option for people with a poor credit history.

While they can be easy to apply for, there are disadvantages especially if you don’t repay the payday loan debt by the due date. So you should consider your options carefully before you apply.

How Do Payday Loans Work?

Payday loan borrowers can apply for payday loans through online lenders or, in some states, at a store. They will need to see proof of your income and your bank account details before allowing you to borrow money. Lenders don’t usually carry out a credit check or look at your monthly expenses, which might appeal to borrowers with bad credit. But because there’s no credit check, it won’t help you build credit history with the credit bureaus either.

You may receive the cash on the spot if you have applied in a store or if you apply online, the loan proceeds will be transferred electronically to your account. This transfer could happen on the same day as your approval. 

In return for the loan funds, you will need a signed, post-dated check or an order that permits the lender to electronically withdraw money from your bank account. This will need to cover the loan amount and any interest and fees. 

Payday loans need to be repaid straight after your next payday, which could be anything up to a month from when you receive the funds. 

How Much Does A Payday Loan Cost?

Payday loans represent a lot of risk to the loan provider, who won’t usually carry out a credit check to assess your ability to repay the loan. Because of this, many lenders often charge very high interest rates and there may also be high fees to pay if you miss your repayment date.

According to the Consumer Financial Protection Bureau, a payday loan generally costs between $10 and £30 for every $100 borrowed. So if you borrow $100 for two weeks, the loan provider could charge you $15, which works out as a high-interest rate of 391% APR. By comparison, personal loan lenders usually charge around 36% APR and credit cards are often below 30% APR. 

If you fail to repay the debt within the agreed repayment period, the lender will add fees to the amount due. So you need to be sure you can repay a payday loan before you decide to take one out.

How Much Can I Borrow With A Payday Loan?

The borrowing limits vary depending upon the laws in the state where you live and your financial situation. Many states try to protect consumers by capping maximum payday loan amounts between $300 and $1000. Some states don’t allow payday loans at all. You can find more information on this in your state’s payday lending statutes.

In practice, most people take out small loans between $100 and $500 for less than 30 days, to cover emergency expenses. 

Remember that you may not be approved for the full amount allowed under your state’s regulations on payday loans. The payday provider may take your salary or other income into consideration however, some payday lenders don’t check your ability to repay. This could put you at risk of falling into a debt trap. 

So you should check that you can make your debt payments on time to avoid additional fees and interest.

How Do I Get A Payday Loan?

• Step 1: Select your payday loan lender. You could choose to borrow money through an online provider, a smartphone app, or a lender in a physical store.
• Step 2: Decide how much you want to borrow. You should consider how much you can afford to repay on your next payday, the amount your lender will offer, and any state restrictions.
• Step 3: Provide your details. The payday lender could ask for proof of income from your pay stub, plus your checking account details. Some may accept a prepaid card account instead.
• Step 4: Accept your offer. You will also need to provide a signed check or pre-authorization to permit the lender to electronically withdraw money from your bank account, prepaid card, or credit union account.
• Step 5: Receive the funds. If you have applied online or through a smartphone app, you will receive electronic fund transfers which could be processed on the same day. If you have made an application with a loan provider in a physical store, you will receive your funds as soon as your application is approved.

What Happens If I Can’t Repay A Payday Loan?

If you can’t afford to make your repayment by the due date, you should ask your bank or card provider to stop the payment from being processed. Do this as soon as possible, but at least one day before your repayment is due. 

Depending on which state you live in and which provider you use, you may be charged high fees for late or non-payment. They may offer to extend the length of your repayment period, but this is likely to incur further fees and interest.

If the lender attempts to take the payment from your bank and it is refused, you may also incur bank fees for failed payments. 

If you can’t repay on time, contact the payday loan provider as soon as possible to explain your situation. They often prefer to collect the money directly from you rather than using a collections agency, as selling your debt will reduce the amount they receive.

You can try to settle your debt by initially offering 50% of the debt and negotiating an agreement from there. Get any new repayment terms confirmed in writing and check that the debt will be exhausted, which means that the balance will be reduced to zero.

Alternatively, your lender may offer you longer to pay back the loan. This will set up a new agreement for you to repay the original amount plus any additional fees.

Who A Payday Loan Is Right For?

Payday loans aren’t right for everyone and it’s important to carefully consider your financial situation and ability to repay the debt. Generally, they are best suited to people who need to borrow no more than $500 for less than 30 days. If you can’t pay back the loan in full within the initial term, you will incur additional costs. This could result in a bad credit score at credit bureaus like Equifax or Experian. 

To qualify for payday loans, you must be at least 18 years old. You will need an active checking account, official ID, and proof of your income such as a pay slip. You might also need to provide your Social Security number. 

Even if you can provide all of this information, you still could be unable to take out a payday loan. Some states prohibit payday loans entirely and if you are active-duty military personnel or the spouse or dependent of someone in active service, you will not be able to borrow from any lender that charges over 36% APR. 

The Top 2 Payday Loan Apps In 2024

Payday loan apps offer a great alternative to a traditional lender. You can easily access cash advance loans through the app on your cell phone any time of day or night, and the finance charges can work out cheaper than other payday lenders.

EARNIN

Earnin is an app that allows you to access cash advances against the money that you’ve earned without waiting until payday. They don’t charge mandatory fees or high interest rates, instead asking users to support the Earnin app by tipping an amount for the service they receive. You can tip as much or as little as you wish, even $0.

You will need a smartphone and access to an online or paper timekeeping system to prove your income. You also have to have a fixed work location and a regular payday, which can be weekly, biweekly, semi-monthly, or monthly. This makes Earnin unsuitable for anyone who receives irregular income or works in multiple locations, such as freelancers.

You can withdraw up to $100 each day, up to the maximum monthly limit set on your account. This is generally $250 for new members but can be as much as $500 on a more established account. Cash advance payments are made to the bank account which you linked to the app. 

DAVE

Dave was one of the first cash advance apps to provide a low-cost alternative to high-interest rates and expensive overdraft fees. It now has a community of millions of loyal members.

Using Dave to set up a cash advance loan is simple. You download the app to your smartphone and link your checking account to see if you are eligible for their account. Once approved, you can choose how much to withdraw, up to your daily limit which refreshes at midnight.

You will be given a settlement day to bring your account balance back to $0, which is usually your next payday. If you haven’t repaid the loan by the settlement date, the funds will be automatically collected from your bank account. 

The Dave app charges a monthly subscription fee of $1 plus an optional fee to receive funds within 8 hours. You may also pay optional tips up to 20% of the amount that you borrowed. If you fail to repay the loan by the settlement date, Dave won’t charge you late payment fees. However, they will not lend you more money until the initial loan has been repaid.

Final Thoughts

Payday loans can be a quick and convenient alternative to personal loans. A credit check is often not needed, which makes it an attractive option for people who don’t have good credit. You can make your application in a payday lender’s store, through online payday loan lenders, or using a smartphone app like Earnin or Dave. 

However, payday borrowing is only meant to be a short-term loan so you need to be sure that you can repay the loan by the due date. If you do not pay the loan back on time, additional fees will be applied to your account which could be expensive. This could also affect your credit score. 

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