How Payday Loans Work

Payday loans, also called cash advance loans, are short-term loans that allow you to borrow a small amount of money for a period of usually two weeks to a month. There are no credit checks on these loans, so those with poor credit will not be denied.

Many lenders ask for you to write a post-dated check for the amount of the loan plus any finance charges and origination fees that they'll cash upon your approval when the loan is due. When the loan is due, you need to have the money in the account or let them know you need to roll it over for another loan period.

When the loan is due, you have the option of rolling it over to a new loan. This option is useful if the due date arrives and you've run into a problem that prevents you from being able to pay the loan in full.

Terms with Payday Loans

State laws vary, but most payday loans offer terms of one to four weeks and usually are not for more than $500, though some states do allow cash advance loans for up to $1,000. You go to the payday loan processor and ask for the loan. They will explain how the finance charges are calculated. You sign the papers promising to pay the loan back on the given day, and if you can't, you understand the terms and fees with rolling the payday loan into a new loan.

Make sure you understand finance charges. Unless your state has specific caps on finance charges, you can pay huge interest rates with an APR in the hundreds or even thousands. An APR (Annual Percentage Rate) is the calculation of what a loan costs on a yearly basis. It gives you a true picture of how much your loan costs you in fees and interest.

Repaying Payday Loans

With any payday loan, you should pay it in full on the day it is due. If you're unable to, you'll start accruing interest. With many states not limiting the amount of interest, this can get very costly. For example, if you borrow $500 for 14 days, and the fees are $15 for every $100, you'll end up having to pay $650 after rolling it over just once. This brings the APR to 390%.

If you pay it off at the due date, you'll pay $575. It's still a bit to borrow, but you'll save money in the long run.

If you mean to pay it off and run short on cash, it's important to take action. If your check bounces, you'll also face fees for insufficient funds. The bounced checks could also appear on your credit report and hurt your credit rating.