How Payday or Cash Advance Loans Work

We all have little emergencies that crop up when we least expect it. They usually only require a minimal amount of cash to solve, but they generally require immediate attention. You may not have the cash readily available, but you will have it when you get your next paycheck. You obviously can’t go to a bank to borrow money because the process would take too long. So what do you do? You get a payday loan. These are also known as cash advance loans because you are being advanced cash against the paycheck you will receive.

With this type of loan, a borrower writes a postdated personal check payable to the lender for the amount to be borrowed plus a fee. The lender gives the borrower the amount of the check minus the fee. The check is held until the loan payment is due, which is typically within two weeks. The lender then deposits your check unless you have already repaid the loan.

Fees for payday loans are either a percentage of the amount of the check or a fee charged per amount borrowed e.g. for every $100 borrowed, you pay $5. If you extend the loan beyond the original time agreed upon, you would pay the fees for each extension. Keep in mind that under the Truth in Lending Act, the fees for payday loans must be disclosed before you accept the loan. You must also receive a written statement that includes the finance charge and the annual percentage rate (APR), which is what the loan would cost you if you didn’t repay the money for a year.

A payday loan is typically a more expensive type of credit because it is for a short-term and there is a higher risk of default. It is not meant to be a solution to long-term money problems, but rather a quick fix for a particular situation. Payday loans are most effectively used by paying them back in full by the specified due date.

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