When you need money fast, you may be tempted to take out a short-term payday loan. Sure, sometimes there is just no getting around it – your rent is due tomorrow and you need that money ASAP. I get it. And occasionally, taking out one of these loans responsibly might be a reasonable course of action for you. But before you do, be sure you know exactly what you’re getting yourself into.

How Does a Payday Loan Work?

A payday loan is a short-term cash loan made by a lending institution, often using no more than an active checking account as collateral. The borrower will usually write one or a series of checks post-dated for a date mutually agreed upon close the borrower’s next payday. The lender then forks over the cash minus their own interest and finance charges.

Online Payday Loans

Over the last few years, there have also been a ton of payday lenders that have popped up on the internet. Their system works exactly the same except that all the transactions are done electronically. These lenders also usually have slightly higher criteria for their borrowers.

Borrower Requirements for Payday Loans

Most people who seek out this type of short-term loan are struggling with credit issues. That’s why the interest rates are so high. But what this means for the borrower is looser approval requirements. Most of the time, they don’t do a full credit check. They usually just ask for pay stubs, proper identification and proof that you have a checking account in good standing.

Payday Loan Terms

Payday loans are typically made for a period of no more than two weeks and charge a 400% annual percentage rate (APR) or higher. Yep, you read that right! Some of these lenders even charge as much as 664.29%!

Thankfully, these loans are short-term, however, so you won’t feel the pinch as badly as you might think. For example, a $500 loan at 664.29% will cost you 126.91 in finance charges. Think long and hard before deciding to roll these loans over, though, or you could find yourself in a huge amount of debt.

Payday Loan Pitfalls

Legislature has been cracking down on payday lenders for several years, often calling their practices predatory because of the exorbitant interest rates and fees. Even so, these establishments seem to be popping up on every corner daily because people still need a way to get fast cash from time to time. But before you apply for a payday loan, consider the following:

  1. You could get “trapped”. Some payday lenders bank their establishment on the fact that when it comes time to pay off the loan, borrowers will have to refinance, therefore paying another fee. This can trap you in a never ending cycle of never being able to fully pay off these loans.
  2. You are risking overdraft fees. The lender can decide at any time to stop offering you renewals or extensions and deposit your checks on the next payday. If you’ve gotten caught up in the trap of rolling those over, it can take you by surprise and result in returned check or overdraft fees.
  3. You are going to pay high fees.Though I’ve already mentioned it, it bears mentioning again since it is the biggest pitfall of payday loans. Interest rates of at least 400% are nothing to take lightly.

Benefits of Payday Loans

It might sound like there are no benefits to payday loans, but the truth is many people struggling with a short-term crisis don’t have anywhere else to turn. In certain cases, you just don’t have a choice and you can certainly look at these loans in a different light. Some of the benefits are:

  1. You get your money fast. Sometimes we need the money NOW. If your electricity is about to be shut off, you may have no choice but to come up with the money today.
  2. They are easy to get. Most payday lenders don’t require a credit check. Their only requirements are a steady income and an active checking account. 
  3. They provide an option for people with no other options. Even if you have decent enough credit, a traditional loan will not usually provide the instant cash you will get with a payday loan. But if you do have less-than-perfect credit, this may be the only loan you can qualify for at the moment.


While payday loans should never be your first choice for a financial solution, there are certainly times when we have all needed to find some fast cash in an emergency situation. The main thing to remember is that…

Payday loans should never be used as long-term solutions. You should only take one out when you know you can pay it off on the next payday without putting yourself in a bind.

Try not to roll one over or refinance or you could end up in a trap of huge fees and a mountain of stress.

 If you find yourself in need of a short-term payday loan, familiarize yourself with the lending institutions terms. And most importantly — always borrow responsibly!

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