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How Does A Payday Loan Work?

May 20, 2008
Many have heard about it a lot of times before people getting payday loans. Probably most have been advised to resort to that. But, more often than not, these very same people have no idea as to exactly how does a payday loan work. So here's a quick overview on how precisely does a payday loan work.

First off, payday loans are quick financial transactions made between a borrower and an establishment that facilitates payday lending. This transaction is usually considered by low-wage workers who need money to cover expenses prior to his or her payday. Payday loans are sometimes known as cash advances, except that the former entails no use of credit cards or other similar mechanism.

So how does a payday loan work? Primarily, there are two common ways in which payday loaners are catered to, one of which is through local payday lending firms while the other is through the internet.

The former, seeing as how most borrowers are low-wage and are limited locally, is used by most workers. This is where they personally go to a lending firm and apply for a cash loan, commonly up to $500, but not usually less than $100. The borrower is then asked to issue a check to the firm equivalent to the total loan. Afterwards, the borrower is charged a processing fee that can range from as low as $10 to as high as $30. This fee is based off the Annual Percentage Rate (APR: the term for the yearly credit cost) and can increase or decrease depending on the amount the borrower loans. Finally, the borrower is given the immediate cash he or she needs or technically intends to loan for his or her disposal.

Payday loaners are expected to come up with the cash within a set period of time. This period of time is usually dictated as two weeks or so, but can vary depending upon every different loaning firm. But the principle that most borrowers carry is that they set the deadline for the pay on the date when they receive their next paycheck or salary. So if the agreement or the firm's policy states that the loan is due on the next week or two, borrowers estimate that loan on the day when they can pay their nearest payday.

So how does a payday loan work if the process is done online? Actually the same principles apply to online payday loans as that to the domestic loaning system, but there are a few differences in terms of the necessary documents as well as the manner in which they are handled. The borrower visits a payday loan website and then completes an online application for the desired loan. The borrower then sends a copy usually fax of the check as well as other bank documents. The money is then sent to an online bank account and the rest is just like the local loaning system.

Since the online financing system is improving today, online payday loan sites usually charge the same fee as personal loans, since loaners are very much attracted to the accessibility of the internet.
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