by Ben Sweiry ·
Modified on 17 January, 2022
To put it simply, a payday loan is a loan that you can obtain quickly to provide you with that extra bit of cash to tide you over until your next payday, or in case of an unexpected bill or emergency, such as an unexpected medical or veterinary bill or perhaps a car repair.
However, you might ask, how exactly does a payday loan work?
This guide will walk you through how payday loans work, step-by-step, by firstly helping you better understand what a payday loan is, and the steps that a borrower takes to get one.
Key Points
- A payday loan is a loan to provide you with a little bit of extra cash to tide you over to your next payday.
- Payday loans are often associated with high interest rates, and therefore shouldn’t be used for frivolous spending.
- There are 5 steps to take before you receive your loan. These include: exploring all your options, checking your legal eligibility, deciding on an amount to borrow and length of borrowing, working out a repayment plan and then applying.
What is a Payday Loan?
A payday loan is a short-term loan typically used to tide you over to your next payday. You can apply for a payday loan for anywhere between $100 and $35,000, for as little as a month or as long as 5 years – the repayment date is agreed between you and your lender upon taking out your loan.
Payday loans are often associated with high interest rates, and therefore shouldn’t be used for frivolous spending. Therefore, before taking out a payday loan, you should explore all potential financial options, which could include borrowing from friends or family, or taking an advance on your monthly paycheck from your employer.
Despite this, Dime Alley’s loans connection service will connect you to a fair and legal lender that suits your personal financial requirements.
How Does a Payday Loan Work?
The next 5 steps will help you to understand how a US payday loan works:
1. Explore all of your options.
Before applying for a payday loan, it is important that you explore whether this financial product is the best way for you to overcome any financial difficulties you may be experiencing.
One alternative is a Payday Alternative Loan (PAL). Credit unions that are members of the National Credit Union Administration offer PALs. You could use money from a PAL to avoid a payday loan or to pay off an existing one. Lower-cost PALs give a borrower more time to pay off a loan than a payday loan does.
If you’re in a financial bind, a family and friends loan may be a great way to dodge a high-interest payday loan. Regardless of the interest rate you decide on, put your loan agreement in writing. This contract should include the amount of money you’re borrowing, the interest being charged or the collateral being used, the payoff period, and the payment amounts and due dates.
Another alternative is, if you are employed, you may be able to speak to your employer about a pay advance scheme. A pay advance is given when your wage is granted to you early. This may be necessary if you are hit with a bill before your next pay day and need funds, and fast.
2. Check the eligibility and legal requirements.
If you have decided that taking out a payday loan is your preferred route, the next thing you need to do is check whether it is legal for you to apply for a payday loan in your state.
Currently, payday loans are legal in 37 states across the US, and illegal in 13 of them. Some of the states that you can use payday loans in, include California, Florida and Texas. It it, however, illegal to use a payday loan service in New York or Massachusetts.
Moreover, there are some basic eligibility requirements that you’ll need to meet to qualify for a payday loan. These include:
- You must be a US resident, over the age of 18.
- You should have a stable, regular income, earning a minimum of $800 per month.
- You should have a valid mobile phone account and a live checking account (for your loan to be deposited into).
3. Decide how much you want to borrow and how long for.
If you pass the eligibility requirements and have ensured that you are a citizen of a state in which payday loans are legal, the next step is to decide how much you need to borrow, and how long you’ll need to borrow it for.
Payday loans are typically for an amount of $1000 or less, but you can borrow anywhere from $100 to $35,000, for a length of time as little as 1 month or as long as 60 months.
Remember only to borrow what you need, rather than what you want. Although it can be tempting, payday loans are intended to tide you over until your next payday or to cover an unexpected bill; not for frivolous spending.
4. Make sure you have a solid repayment plan.
Ensuring that you have a solid repayment plan is absolutely crucial before you apply for your loan. If you repay your loan on-time and in full, this can actually have a positive impact on your credit score and make you a more favourable candidate in applications for financial products in the future.
However, if you know that you will be unable to meet your repayments, you should make sure to contact your lender immediately to sort an alternative arrangement. If you fail to repay your loan and don’t inform your lender, not only will the amount owed rise, but this could result in your lender taking you to court. For this reason, before you apply for a payday loan, make sure you know how you’ll be repaying the money when the time comes.
5. Apply online.
Lastly, once you’ve decided that a payday loan is right for you, met the eligibility criteria and figured out a repayment plan, feel free to apply for a payday loan online!
As a loans connection service, Dime Alley connects you to a lender that suits your financial needs and doesn’t take a penny from you, the borrower.