Understanding Payday Loans: How Does a Payday Loan Work?

Did you know 78% of Americans say they live paycheck to paycheck?

Have you found yourself in a tight situation lately needing extra cash to hold you over? If so you’re in the right place!

You might be considering getting a payday loan but wondering how does a payday loan work? Keep reading to learn everything you need to know about payday loans.

What Is a Payday Loan?

First, let’s get clear on what a payday loan is. A payday loan is a short term loan where the lender offers the borrower a high-interest loan until payday. 

The principal amount is based on the amount of the borrower’s next paycheck.   

How Does a Payday Loan Work?

If you decide to take out a payday loan you will usually have to submit proof of income. Whether this is in the form of direct deposit or paystubs the lender will want to verify that you will indeed have the money to pay the loan back on your next payday.

Normally the lender will lend you the money as long as you postdate a check that will be cashed on your next payday. This gives the lender collateral for the loan they give you.

The average amount of money lent is between $300 to $1,000. Lenders like Bonsai Finance give an average of 14 days to pay back the loan since most people get biweekly paychecks. At the time the loan is due the lender takes the money directly out of your bank account. 

If you need extra time you can ask for an extension but keep in mind that there will more than likely be extra fees associated with an extension.


If you struggle with bad credit then a payday loan might be your answer because some of them don’t do a credit check. They instead go by your employment, pay date, and keep your paycheck as collateral.

Another benefit is that you don’t have to wait weeks for approval. This is perfect for emergency situations. If you complete the application early in the day you might have funds within 24 hours. Thanks to technology you can have the funds directly deposited into your bank account.

The application time is also quick. It doesn’t take longer than 30 minutes to fill out the entire application. 

How to Qualify

In order to qualify for a payday loan, you need to be at least 18 years of age and show a valid form of identification. 

You will also need to have an active checking account along with proof of income. 

Once you fulfill the above requirements the lender will ask the borrower to write out a check with the total amount being paid back and the date the lender can cash the check. The total amount paid back includes the amount borrowed plus any interest and fees the lender charges. 

If this is done online via direct deposit the borrower will have to sign electronically the approval of a bank withdrawal on payday along with the amount.

Rolling Your Balance Over

If payday comes and you find yourself in a tight situation financially some lenders will allow you to roll over your balance as long as you agree to pay the additional finance charges they charge.

For example, if they charged you $100 in fees and interest then when you ask for a rollover you agree to pay an additional $100 on top of your original loan amount. If you’re not careful you can end up paying more than you borrowed if you continue to roll over your amount week after week.

This is why when you take out a payday loan you will want to make sure you can pay it back on your next payday. If not you can find yourself in a bind come payday.

Long Term Strategy

If your paycheck is never enough to cover your daily living expenses then a payday loan is not your solution. Because of the high fees and interest rates, this is a loan that should only be used for emergencies. 

If you suddenly need new tires to get to and from work or emergency car repair then this is a good option but if you’re thinking of using these loans long term to help pay your bills you will find yourself worst off. The fees will add up quickly.

If your checks start to bounce because you don’t have enough to cover the payment then you will end up also paying overdraft fees with your bank on top of paying your lender fees for a bounced check.

Eventually, it can get out of control to a point where the lender sends your account to a collections agency. This will ruin your credit and will also make it almost impossible to borrow a payday loan in the future. A lender also has the option to sue you if they choose instead of selling your account to a collections agency.

Make sure to read all the fine print to not dig yourself into a further financial hole than when you started.

Ready to Cover Your Next Emergency?

There you have it the answer to the question how does a payday loan work? Now that you have all the details you can make an informed decision if a payday loan is the best decision for your situation. 

Everyone has different emergencies come up and if you need quick cash a payday loan might be the answer for you. 

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