What Is a Payday Loan: How Does It Work?

You may have heard about payday loans or used one in the past. These loans can be elusive if you don’t know what they’re intended for and how to use them properly. 

So, here’s what you need to know about payday loans so you can get the most out of your borrowed money.

Short term

Payday loans are not intended to be long-term loans like credit cards or lines of credit. Instead, and as their namesake suggests, these are short-term loans that are meant to carry you over until you receive your next paycheque or until you can get some cash. 

That’s where the name comes from – initially, these loans were developed in a more private capacity and had more well-off people lending to those who were short on their bills before their upcoming payday. They can be a great source of emergency loans for those who need money urgently.

Small amounts

In contrast to bank loans and similar loans, payday loans view things on a smaller scale. They are primarily used for small bill payments and financial responsibilities that come before payday. They aren’t often given in amounts higher than $1,500. 

Lenders also keep the amounts low for a reason since it helps ensure borrowers will pay them back in full by the due date.

High interest

Payday loans are higher in interest because they are unsecured and are often offered to people without a credit check or background check of any kind. As such, the lender hikes up the interest rate. 

You’ll have some agreed-upon fees to pay upfront, which are standardized and inexpensive. However, if you neglect to pay back the loan on time, it stops being in your best interest. For this reason, to get the most out of your payday loan, you must always aim to repay it in full by the due date.


Payday loan fees are pretty standard. Often, they come off the top of the loan, so you don’t overextend yourself. For example, if the fees were 5 percent of the borrowed amount, and you borrowed $1,000, you would only receive $950 – the company would keep their 5 percent fee off the top. 

When you pay back the loan, you only owe what you originally requested: $1,000, not more. This can be very helpful in ensuring you can pay back the loan in full.


One of the greatest features of modern-day payday loans is that they are now fully available online. By simply filling out a short form and with a very short waiting period – often 48 hours or less – payday loans can be much more accessible than bank loans. 

Several reputable payday lenders operate online, so you can search for one that suits you best.

Reasons to borrow

For many reasons, someone might need to borrow from a payday lender. This is an excellent option if you do not have a large sum of money, have a poor credit rating, or cannot get to a bank. 

It is an easy and quick option for acquiring money if you have an unexpected bill or payment that needs to be made and know you have money coming in but can’t currently access it.