Payday loans can be useful tools if you find yourself needing to manage your short-term cash flow. This is accomplished by getting an advance on your regular paycheck. These loans typically involve taking an advance from a lender based on recent pay stubs for a maximum loan term of two weeks. While there are various drawbacks that should be considered, this lending mechanism has its place.

Payday Loan Mechanics

A payday loan usually allows you to borrow a set amount for a two-week term. To secure such a loan, you go to a payday loan provider, write a post-dated check for the amount of the loan plus fees, and receive the money you need to cover short-term cash shortfalls. You are usually required to bring several recent pay stubs to legitimize the amount of the payday loan. The lender will likely ask you to return on the day that you are paid to close the loan. If you fail to show up, the lender will simply put your check into the banking system and receive repayment that way. The lender prefers that you show up because it serves as some assurance that repayment will run smoothly. The lender’s concern is that your check will not clear and that other collection measures will be needed.

Online Options

More and more, payday lenders are making themselves available to borrowers online. If you choose to go with an online lender, you should do some research as to the company’s legitimacy before supplying personal information. Online, the lending process is streamlined and made more efficient on multiple levels-–lending protocols and paperwork are minimized, allowing for a significantly shortened application process and near-instant loan decisions. This increased efficiency allows you to save both time and money. Furthermore, should you receive a negative response from one lender, because the process is quick, you can easily pursue other options.

The Drawbacks

Despite multiple levels of security afforded to a payday lender, the lender knows that if you are using its services, you are not in an ideal situation. For this reason, the fees associated with payday loans tend to be high. These may be as high as ten percent of the amount you wish to borrow and may be coupled with a flat override fee as well. While you likely need the money, you should consider the impact that this expense will have before proceeding.

The other major factor to consider is that accelerating the receipt of your paycheck is an acceptable option on a limited basis, but it can create a dangerous cycle. If you repay one loan and are forced to take another, you will effectively lower your pay rate by building in the fees at each paycheck. As the cycle repeats, you may fall further and further behind in getting current. This becomes a very expensive and unsustainable option and can balloon very quickly. Therefore, while payday loans have their place, they should be used in moderation.

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