How Do Payday Loans Work? Pros & Cons

How Do Payday Loans Work

There are many types of loans, including personal loans, secured loans, business loans, and title loans. Despite being familiar with these common types of loans, you should know more about payday loans, another type of credit.

You can apply for a payday loan to get cash until your next paycheck. It’s a short-term loan that you must pay within a few weeks, along with its triple-digit annual percentage rate (APR).

While most people will suggest you avoid a payday loan due to its high APR, its other benefits would compel you to apply for the same. You will gain a deep understanding of payday loans, how they work, their pros, and cons in this article.

Pros of payday loans

Payday loans offer these advantages, which attracts people to them despite their negative consequences.

●     An easy and quick application process

Of all the loan types, a payday loan is the easiest to apply for. The entire application process hardly takes five minutes to complete. Post application, you can get immediate cash or bank transfer within 24 hours.

●     Not many requirements

There aren’t many requirements for payday loans. Payday loans typically have the following requirements:

  • Valid government ID proof,
  • Regular job or regular income source,
  • Active bank account, and
  • Applicant should be 18 years or above

With these four requirements, you can quickly apply for a payday loan and get instant cash.

●     No need to have high credit score

In every other type of loan, such as a business loan, personal loan, or secured loan, a high credit rating is an important requirement. Payday loans do not consider your credit score and you can get one even with a bad credit history.

●     A payday loan is unsecured

Unlike other loans, a payday loan isn’t secured by your property. Thus, if you’re unable to repay your loan amount, the payday lender can’t seize your property.

However, since the lender may have electronic access to your bank account, they might use your bank balance to get the money back.

Cons of payday loans

Apart from the above pros, you must also know about the following cons of a payday loan.

●     They involve high interest rates

A normal bank charges 3-36% interest on a loan amount, and credit card companies charge a 12-30% interest rate. However, a payday loan lender usually charges a triple-digit interest rate, say 400%.

Due to this, your interest amount may sometimes exceed your actual loan amount.

●     Payday loans are risky

Due to high interest rates, people often fall into the debt cycle due to their inability to repay the entire loan amount. Plus, such a loan neither helps you build credit nor does the lender whether you’d be able to repay the amount or not. Thus, payday loans are risky.

●     They have access to your bank account

Since payday lenders have access to your bank account, they will use your bank account to get the money back if you’re unable to pay the loan amount.

This not only harms your credit score but also leaves you with overdraft fees and bounced check fees if your account is short of sufficient balance.

●     The payday lenders can take you to the court

If you cannot repay the loan, the payday lenders can sue and take you to court for the money you owe them. This can lead to severe effects like jail time, penalties, etc.

How do payday loans work?

Payday loans are the only option if you need cash in an emergency. Depending upon your state, you may apply for the same either online or offline store via a payday lender.

In addition, each state has its own laws regarding payday loans, such as borrowing limits, interest rates, repayment terms, and so on. Payday loans are also illegal in some states.

Even so, if you’re eligible for a payday loan and your state permits it, you can apply for it to get instant cash, a check, or a bank transfer.

The entire loan amount plus the APR will be due within a predetermined period of time, usually 14 days or until your next paycheck. The APR or finance charge depends on the loan amount.

Due to these short-term repayment terms, finance charges are typically in the triple digits. For example, 300%, 391%, 400%, etc. Over 2.5 million Americans apply for payday loans each year despite these two major disadvantages.

There are several other reasons why people prefer payday loans over other loan types. Poor credit or no fixed income can be among the reasons.


As mentioned above, payday loans might seem like the best option for immediate cash, a check, or a bank transfer, but they have several other problems.

Nonetheless, if you’re familiar with all their terms and conditions, they’re the best option to consider.


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