How Payday Loans Work

Payday loans are short-term loans of cash based on the borrower’s personal check held for future deposit or on electronic access to the borrower’s banking account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. Some loans take the form of the borrower writes a check for the total loan amount and receives the loan amount minus the financing charge. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.

Lenders hold the checks until the next payday when loans and the finance charge must be paid in one lump sum. To pay a loan, borrowers can redeem the check by paying the loan with cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period.

Requirements to Get a Payday Loan

All a consumer needs to get a payday loan is an open bank account in relatively good standing, a steady source of income, and identification. Lenders do not conduct a full credit check or ask questions to determine if a borrower can afford to repay the loan.