Payday Loan: What is it and How Does it Work?

Currently, there are many different types of insurance in the United States. You can insure your life, home, or car. But, unfortunately, one cannot be insured against unforeseen situations that can happen in life.

Of course, having a savings account can become a kind of insurance. However, not everyone can afford to save enough money to feel safe from any adversity that may come. For situations when money is urgently needed, but there is not enough of it, and there is a payday loan.

Payday Loans

What is a Payday Loan?

A small amount of money available for a short period is called a payday loan. Under a payday loan, the borrower cannot receive more than $1,000. However, this amount is rather an exception. The most common amount available for these loans is $500.

Payday loans are short. They are limited to one month. The more common payday loan term is 14 days, which, in fact, lives up to its name. 

How does a Payday Loan Work?

Payday loans are considered the most accessible type of loan to get. This is because they have much lower requirements than, for example, personal loans.

  • The first thing a borrower needs to do is to decide on a lender. To do this, it is recommended to prequalify with several different lenders. A soft credit history check is carried out during prequalification, which does not affect the credit rating. Thus, borrowers can get several available loan options and choose the one that seems to be the most beneficial.
  • Once borrowers choose a suitable lender and loan, they need to fill out a loan application on the website. Sometimes this can be done using an application on a mobile phone. It is important to provide all required information accurately and truthfully. 
  • After some time, usually a few minutes, the creditor will decide on the creditor’s application. If approved, the lender will receive an email notification.
  • After the loan agreement is signed, the borrower will have access to the money within a day or the next business day. The exact timing depends on the chosen lender.

Is it Possible to Get a Payday Loan with Bad Credit?

It is possible to get a payday loan with a bad credit history. Payday lenders are usually not limited to the borrower’s credit history alone. They check income and may ask for a bank card statement to determine the financial habits of the borrower.

So if the borrower’s income and expenses ratio suits the lender, it will allow access to a payday loan even for those with bad credit history.

Payday Loan Interest Rates, Fees, and Risks

Payday loans only offer a fixed interest rate. This is due to the fact that such a loan must be repaid in one payment, along with all interest and fees.

Payday loans may include several fees. For example, a rollover fee if the borrower needs to renew a loan, a late payment fee, an overdraft, and non-sufficient funds (NSF) fee if the borrower’s bank account does not have enough funds while processing a payment. 

The borrower will know all the fees included in the proposed loan from the loan agreement. In addition, the federal Truth in Lending Act requires payday lenders to disclose any financial costs associated with a loan.