How Do Payday Loans Work, Who Uses Them, and Why?

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How Do Payday Loans Work, Who Uses Them, and Why?

A payday loan is a small loan, usually $500 or less, that must be paid back on your next payday along with interest. Most payday loans last for two weeks. In some states, you can extend them for another two weeks or even longer. They go by many other names, such as payday advances, cash-advance loans, and others. You can take out a payday loan from a physical location, or you can take one out on the Internet.

When you take out a payday loan, you have to set up a way ahead of time to pay it back; this assures the lender that it will get its money back. Generally, you must write a check ahead of time for the loan plus the fee and give it to the lender so that the lender can deposit it on your payday and get its money back. For example, if you wanted to take out a $300 loan and there was a $50 fee (the interest), you would write the lender a check for $350. The lender would then give you $300. From there, you can spend the money right away. On your payday, the lender would cash the check that you wrote earlier.

Some lenders do it a little differently. You would give them access to your checking account first. They would then deposit your loan money into your account on the day you applied for the loan. Then, on your payday, they would withdraw the loan amount plus the fee from your checking account.

What do people use payday loans for?

Many people choose a payday loan due to a financial emergency, such as a car repair or a medical bill. Some use them for non-emergency expenses that pop up occasionally, such as when their checking account is overdrawn, to pay off a debt collector, if a credit card is maxed out, if they are unable to get a bank loan, or to get collection agencies to stop bothering them. In some of these cases, they are just using a new loan to pay off an old loan.

But many people also take out payday loans for routine bills, such as rent or their cell phone bill. Or even to put food on the table for their families.

According to the Pew Charitable Trusts, most people who take out payday loans are renters, are not college educated, are separated or divorced, and earn less than $40,000 a year. Most borrowers use these loans not for emergencies, but to cover regular living expenses. The average borrower is in debt for five months out of the year.

In recent years, some lenders have begun to expand their offerings, for example, providing a certain amount of financial education to borrowers.