Payday Loans

Quick Summary

A payday loan is a loan based on – and paid from – a source of income. It can also be called a cash advance or a short term loan (although those are technically different terms). "What's the point of getting a loan based on my income, when it's low income that I'm struggling with?" you may be wondering. But the key to payday loans is that they are based on future income: Lenders take a look at your financial situation, and what income you ]can expect in the future (yes, typically on your payday, if you have one), and then offer a loan that reflects these numbers.

For this reason, these loans are typically used to help people and businesses stay afloat if their cash runs out but it's still going to be a while before they receive new income. It's not designed to be a long-term source of capital, but rather a short term solution to be used sparingly when necessary. A common example is a sudden emergency – say, a medical need or broken appliance – that requires a lot of cash upfront to deal with, leaving your account short when it comes to buying necessities or paying for necessary services. A payday loan can bridge that important gap until your next cash infusion.

The amount of a payday loan can vary depending on your situation. One of the most important factors is how large your expected paycheck will be. Since your upcoming paycheck is typically used to pay off the loan, lenders will not want to exceed that amount – and will want to leave room for interest payments as well.

Advantages & Disadvantages

Advantages

-It's usually very fast. Payday loans solve problem fast. If you apply during the work week, you can often expect to receive a payment as soon as tomorrow.

Disadvantages

- Repayment is important. Terms for a payday loan tend to be strict. Payment is typically expected on your next payday, and penalties for not repaying in full (including any interest) on time can be severe (extensions may be possible, but come with new fees). It's important to recognize this and plan ahead to make sure you will have enough extra cash on hand to repay the loan – preferably without going back into debt.

- Income situations can vary. If you do receive a regular paycheck, a payday can be a great, quick fix for a cash shortage. However, not everyone's income is so stable. Some people may be running their own business and receiving money via accounts receivable or staggered payments. Some may be between jobs without a reliable source of income. In these circumstances, a payday loan may be difficult to acquire.

What Else Should I Know?

While payday loans are often thought of as "emergency loans," they can have many uses. Remember to think about your situation carefully and decide what loan could work for you. Payday loans don't always have to be for an emergency, but they are often used as short-term loans to help accomplish a short-term goal.

As always, if there is anything you don't understand about the process, payment date, or specific terms, we encourage you to contact your lender directly and talk it through. More information is well worth the time it takes to make contact – and then make a smart financial decision.