Payday Loans: What Are They and How Do They Work?


If you’re looking for a short-term loan solution, even just a small amount of money, then payday loans might be worth looking into. As with any other credit product, a payday loan borrows money from a company and pays it back with interest.

But these loans work a little differently than other loan products. These loans are designed as follows:

  • Arranged and approved shortly
  • Used when you only need small loans
  • Used to borrow for shorter ones

These loans are usually used for short-term bridging financing. A standard loan, such as a secured home loan or an unsecured loan, can take weeks to complete and come with a higher loan limit than you may need. These types of loans are usually designed to allow people to borrow more money over the years.

Payday loans, on the other hand, work more on the cash advance principle. For example, you need a few $100 to make ends meet until the next time you get paid. Money can be tight and you may have an unexpected bill to pay or need quick access to cash right away.

These loans get their name because they give you a cash advance until you get paid. Used correctly, they should give you access to a small loan for a few days or weeks almost immediately. When you take out a payday loan, your repayment time is generally set for your next payday.

So when you close this type of financing you will usually find that:

  • You can borrow a small amount with a quick loan
  • Your loan request can be processed and paid out to you remarkably quickly (ie within 2 hours).
  • You pay off the loan later, so you don’t have long-term debt overhead.

It can be important to think about how these loans are supposed to work before applying for one. This can be a great way to get a quick and easy cash injection when you need it. But if you don’t pay it back when you should, then interest costs can be a problem.

Because of how payday loans work, their fees can be much higher than standard loan fees. However, this may not be a problem if they are used properly. If you pay back what you borrowed on time and don’t roll over your debt or keep borrowing, this may be a viable loan solution for you.

How do instant loans work?

If you’ve ever taken out a standard loan, you may already know that it can be a lengthy and tedious process. You may have to wait weeks to find out if a lender is willing to give you a loan, and it may take years to pay off your debt. However, instant loans are designed very differently.

This is not a criticism of regular loans. They’re just designed to work differently. Payday loans are based on an alternative cash advance system and may work on completely opposite principles to other loans. For example, they can:

  • Give you a loan for a small amount of
  • Allow you to get the money you need virtually
  • Don’t let a lengthy credit check and approval process guide you
  • Get paid out in a few weeks (or even days) with a fixed amount of interest added on your next payout

Now let’s be honest. You may have learned that payday loans have high interest rates (here is CreditNinja’s take on interest free loans). This might not come as a surprise given the benefits they can offer you. They can sometimes cost more, but you generally won’t suffer if you manage your loan properly. If you pay back what you borrowed when it is due, you only pay a fixed amount on top of your loan amount.

However, if you are not paying back as much as you should, maybe if this type of solution costs more. But if you use instant loans properly, this may never be a problem. For many, the benefits of this type of short-term cash advance far outweigh the downsides.

You may not have to go through a lengthy credit approval process for this type of loan, but you may need to tick a few boxes before you can apply. The criteria set by a payday loan company can vary, but typically you may need to:

  • work full time.
  • Earn above a minimum amount at a time
  • Maintain a bank account that has a direct debit

Instant payday loans can be a quick and easy lending solution for those who may only need a small loan for a short period of time. These loans can be an alternative worth considering if you ever find yourself in this situation.

What do people use a payday loan for?

Borrowing money doesn’t always mean borrowing a lot loan a long time ago. Sometimes you may need a smaller loan to make ends meet for a few weeks or even days. This is where an advance loan can make sense.

There are many different reasons why consumers choose to take out a short-term loan over more complicated or longer-term standard loans. For example, you may need to borrow a smaller amount for a shorter period of time because you:

  • An unexpected bill arrives
  • Having to pay for something you didn’t do
  • Got a month full of expenses and need some extra money to make ends meet
  • Find a bargain that you need cash to buy on sale right now, but don’t have any cash left until the next time you buy it

A payday loan differs from other loan types in many ways. This type of borrowing is more likely to help you:

  • Borrow smaller amounts (i.e. hundreds rather than thousands of pounds).
  • Get a loan in 24 hours or
  • Skip the standard loan approval procedures and wait
  • Borrow money that you can pay back next time

This type of loan is suitable for many people who find that they may need to borrow money but find that their borrowing needs do not match traditional borrowing methods. For example, let’s say you see a cheap vacation deal that’s only available for a few days. If you do not receive a deposit by then, the offer will be closed.

You may not have the money now. You can be a few weeks away from your next payday if you have access to the deposit funds. But you may not be able to get a bank to lend you the small amount you need, and in any case they are doubtful about approving a loan on time.

An advance loan may be an alternative worth considering. This could get you the money you need within a day. All you then have to do is pay back what you borrowed plus the interest fee charged and you’re sorted.


About Author

Comments are closed.