What Is a Payday Loan? Everything to Know in 2022

Cash has a tendency to come and go, but sometimes we need access to cash fast. For those looking to secure funding quickly, they might be overwhelmed by the number of loan options out there. If a borrower is looking for a smaller loan that is secured notably quickly, they might be interested in learning more about payday loans. But what is a payday loan and what should a borrower know before moving forward in the application process?

In this article, we’ll provide a payday loan definition, some payday loan examples, as well as some of the most common questions borrowers have when first exploring payday loans. With the help of SAIL Loans, you can learn if a payday loan is the best option for you. 

Payday Loan Definition and Characteristics 

The definition of a payday loan is a short-term loan in which the financial lender will provide credit with high-cost interest. They are called payday loans due to their repayment period, which is incredibly short-term and typically paid by the borrower’s next pay period. They are also often referred to as “cash advance” or “check advance” loans because they provide immediate credit to those who need funding quicker than they anticipate they will receive elsewhere. The payday loan agreement will specify the loan’s repayment timeline and borrowers will usually pay off the loan all at once. When paying off the loan, borrowers will write a post-dated check for the loan’s full amount and provide the lender with authorization to secure those funds on or before the payday loan due date.
 
Payday loans are usually smaller amount loans and loan limits will vary by state. The average payday loan limit is $500 but some lenders might offer higher loan amounts. While these loans offer very fast funding, they are considered a high-risk financial move due to payday lenders’ high-interest credit lines that disregard an individual’s spending habits or previous financial health. A payday loan can be rolled over to the next payment period but for an additional finance charge with the same high-interest rate. This causes approximately 80% of borrowers to become cyclical customers. Failure to repay a payday loan might negatively impact borrowers’ credit if they are unable to repay the loan once payday arrives. 

Payday Loan Example

To properly understand what a payday loan is, let’s look at a payday loan example. Let’s say that Sarah needs $100 but will not have access to this money until her next payday, which is in less than two weeks. Sarah researches payday loan providers in her state and finds a payday lender in her area. The lender confirms Sarah’s income and checking account information and will deliver the funds in as little as 15 minutes. If Sarah were to choose an online payday loan, she would still be able to anticipate access to that cash within the next 24 hours. 
 
The payday loan provider will ask for a signed check or formal permission to electronically withdraw funds from Sarah’s checking account. The loan is due to be repaid immediately after Sarah’s payday, but in other payday loan examples might be paid within a month depending on the provider. For an in-store payday loan provider, Sarah would need to return to the payday loan provider location to repay the loan amount, and if she misses that appointment the lender would have the right to cash Sarah’s check or make the appropriate withdrawals from her account for the loan’s amount including interest. An online loan provider will electronically retrieve these funds. 

How to Apply for a Payday Loan

Payday loans are typically provided by small credit merchants in physical locations that will provide credit applications with a loose qualification and approval process. Some payday loan providers might also be found online. Interested applicants will need to provide pay stubs from  their employer that indicates their current income levels. Lenders will usually dictate the loan’s principal amount based on a percentage of the borrower’s short-term income. Borrowers should also consider finance charges when thinking of applying for payday loans, which typically cost $15 for every $100 borrowed.

Payday Loans Explained: Common Questions Answered

Now that we know the definition of payday loans, as well as how to apply for one, let’s explore some of the most common questions borrowers ask when first considering a payday loan. Some of the most popular payday loan questions include: 

How Do I Qualify for a Payday Loan? 

Payday loans are popular options for borrowers with poor or bad credit because payday loan lenders typically ditch a traditional credit check or contemplate a borrower’s ability to repay the payday loan. This is often why payday loans are viewed as predatory because they are primarily marketed to those who already have very little access to money. To qualify, applicants will only need proof of income, access to a checking account, and be 18 years of age or older. 

What is a Payday Loan’s Interest Rate? 

When applying for any type of loan, borrowers should always do their research on the loan’s interest rate. Each payday lending merchant will work differently and feature unique interest rates for payday loans, but the annual percentage rate for payday loans can be extremely high. Payday loans are often viewed as the least affordable method of borrowing money, with many states implementing strict lending regulations that payday loan providers will usually try to work around to support their business. 
 

What are the Pros and Cons of Payday Loans? 

Payday loans are a great option for those seeking a smaller loan amount who need money fast. Payday loans are a valuable option for those that are confident they will be able to pay it off within the next two weeks. That being said, the risks involved with choosing a payday loan often outweigh the benefits of securing this funding quickly. Finance charges can add up, and with an already high interest-rate borrowers might find themselves quickly experiencing an avalanche of repayments. Generally speaking, those looking for a loan should look into less-expensive alternatives before moving forward with a payday loan, regardless of how fast they might be able to secure cash. 

Get Approved for a Loan Fast with SAIL Loans! 

Payday loans are high-interest and short-term loans that should be treated with caution for borrowers that are not confident in their ability to repay the loan’s amount. While access to quick cash can be an enticing incentive to apply for a payday loan, there are more inexpensive options out there for borrowers that might have poor credit with a need for quick funding. SAIL Loans seeks to simplify the process of getting approved for a loan, with both in-person and online lending options for borrowers that need funding fast. 
 
Boasting a simple qualification and application process, expedited payments, and flexible repayment options, SAIL Loans is the financial lender that borrowers can trust to have their best interests in mind. Learn more about SAIL Loans today!