How Payday Loans Work

Currently, there are many different types of loans available in the United States. While every person is likely already familiar with the concept of larger mortgage and car loans, many individuals may not be fully aware of the many possible credit options meant to provide small, yet ultimately very necessary funds as quickly as possible. While credit cards are certainly very popular, applying for a new card may sometimes take several days before the application is approved, and then even up to two weeks to actually receive the real plastic card. Sometimes, especially when financial obligations arise very unexpectedly due to a medical emergency, waiting this long may not be possible and another option will need to be considered. One of such options is a payday loan, which can be obtained for a very small amount and the applicant can be approved a lot quicker than will normally be possible for all other types of loans.

Payday Loans

A payday loan, as its name stipulates, is meant to provide a small amount of credit meant to last until the person’s next pay period. In other words, an applicant that normally receives their paycheck on Friday, but needs a small yet-necessary loan on Wednesday, may be able to apply for a small payday loan to cover the necessary expenses that will appear in their next two days until payday. Consequently, many payday loans may be taken out for amounts as small as $100 dollars, and will very rarely exceed $1000, as their purpose is to only provide a way to cover the most essential of expenses. Additionally, every payday loan application will require the applicant to show proof of income, and their ability to repay the loan when it is due. In addition to the applicant’s income statement, the only other document that will be required will be an acceptable form of identification, and most approved applicants will receive their funds on the same day.

Given that all payday loans are provided for applicants that have no personal savings and who may have already maxed out their credit cards, every such loan is considered very risky for the creditor. The default rate of payday loans is currently very high, and consequently many creditors will only lend small amounts, and the interest rate of their loans may also be very high. It is not uncommon to find payday loans with an interest rate of 25%, which is not annual but instead is applied biweekly or even every week in certain cases. Therefore, a payday loan of $200 dollars at this interest rate will require the borrower to return $250 after two weeks, and the debt amount will grow very, very quickly if the loan remains outstanding for a longer period of time.