How Do Payday Loans Work Exactly?

There are many available options when looking to borrow money, depending on a person’s particular situation. However, factors may eliminate some of those many options from true possibility.

Payday loans are one type of borrowing option that is almost always available for people. It is ideal for those with a poor credit rating. These loans can also benefit those who don’t have time to go through the red tape of acquiring a bank loan.

Let’s learn more about how payday loans work:

Payday loan application

There is still an application of sorts with payday loans. The process consists of the borrower’s personal information and bank information. It is used to deposit the money directly into the borrower’s account.

The application can be made in person at a physical payday loan shop. You can also do so online. There are many lenders of payday loans online available, allowing you to make the application easily.

Payday loan requirements

A few conditions must be met to acquire a payday loan. The borrower must have a bank account, a steady source of income, and a permanent address. In Canada, they must be a Canadian citizen and be over the age of 18.

3. Acquiring the money

Once the application is approved – there are very few reasons why it would be denied – the lender proceeds to deposit the money into the borrower’s account. The amount is usually the loan amount minus the lender fees. The money is lent to understand that the full amount will be paid back within a specific period. This period is usually fairly short, with the loan often needing to be paid back within one to three months of the borrowing date.

4. The terms

Each lender is slightly different, but the loan has some pretty clear terms which borrowers should follow to avoid being penalized with fees. The loan will have a very clear date by which it should be paid back, and the lender will lay out exactly the amount of fees they charge for the loan. Other terms will include the interest charged if the loan is not paid back in time and other important information regarding how the loan will be received and how repayment can be made.

5. Loan repayment

Modern-day lenders typically do an automatic billing from the borrower’s account, or the borrower can make the payment online or in person. Methods that are less common now are using cheques, either post-dated and provided when the loan is taken out or provided on the due date of the loan repayment. Some lenders might still accept this or other forms of repayment. However, digital and automatic are becoming increasingly popular.

6. Rolling the loan

Some payday lenders will allow borrowers to pay only the fees on loan and roll it over to a new due date, with an additional set of fees. This does ensure that the borrower doesn’t get slammed with the overwhelming interest fees and only has to pay a set fee instead. It also allows them to have more time to collect the money needed to pay back the loan. This practice is not allowed in some areas, though, and not all payday lenders offer it.

7. Affecting your credit

It’s important to know that payday loans won’t build your credit rating or negatively affect your credit rating if you take them out frequently, as long as you pay them back on time. This is because payday lenders don’t do a credit check when approving a payday loan, so unless the loan defaults, there isn’t any time when the loan is recorded with the credit bureau.