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What Is a Payday Advance and How Does It Work?

When you run short of funds to meet an unanticipated expense, a payday advance offers a viable way for obtaining the cash to cover your immediate needs. A payday advance, also referred to as a payday loan, is a short-term loan for a small amount of money that the borrower typically agrees to repay on the date of their next paycheck. This credit option provides individuals with a resource to stay on top of their financial obligations between paychecks and avoid incurring the fees or penalties assessed for failing to pay a bill on time, overdrawing a bank account, or writing a bad check.

Loan amounts can vary based on a number of different factors determined by the lender including net income credit history and credit score. Payday advances are usually limited in amount by how much a borrower earns and are generally for less than $1,000. Additionally, states set maximum-level restrictions on payday loans that cannot be exceeded by state-regulated lenders. These consumer protection measures ensure that individuals do not borrow more money than they are capable of repaying. Regulated in this manner, payday advances effectively bridge a service gap by fulfilling the needs of consumers seeking loans for sums as little as $100 and other small amounts that are unavailable through a bank.

Application Requirements and Approval

While eligibility requirements can vary depending on the lender, applicants for a payday advance generally have to possess an active checking account, documentation of a regular income, and identification that proves they are at least 18 years old or the minimum age mandatory in their state. The application will also normally request personal information such as phone number, address, and Social Security number. Along with presenting evidence of their pay schedule and gross and net earnings, applicants may be required to demonstrate that they make an income above a minimum level or show that they have maintained employment at their present job for a prescribed length of time.

After receiving the application, the lender informs the applicant of their lending decision, and if approved, the amount they have been approved to borrow. Most payday advance providers do not require borrowers to have good credit. Many lenders utilize risk assessment services to determine whether a prospective customer has active loans or outstanding debts with any other companies.

In-Person Payday Advances

Conventionally, consumers visit a payday advance store, where they complete a paper application and, upon approval, sign a lending agreement and disclosure documents mandated by the Truth in Lending Act. The borrower then writes a post-dated check for the loan total plus finance charges and receives the funds immediately in the form of cash or a money order. At the date of the borrower’s next paycheck, the lender redeems the check, unless the customer returns to the store to repay the loan in cash.

Securing an Advance Online or Over the Phone

For further convenience, many payday advance providers now offer online and telephone loan application services. Online forms allow consumers to apply for a payday loan at all hours and from any location using a computer, tablet, or smartphone. Over the phone, a customer service associate takes down the applicant’s personal, financial, and income information, then informs them of their approved loan amount. Phone applicants, however, will need to have access to the Internet to remotely sign all loan agreements and disclosures.

In both the online and phone application process, applicants provide a checking account and corresponding routing number, which will be used for the direct deposit of their payday advance funds, usually within 24 business hours. Sometimes lenders offer immediate cash pickup at the nearest store location for remote applicants who need their money right away. Rather than having to repay their loan in person, a borrower who acquires their payday advance online or over the phone can in most instances opt to use their bank account or debit card information to have payment automatically withdrawn on the loan due date.

Payment and Fees

Whatever method you choose to secure a payday advance, the repayment will typically be due on or near the date of your next paycheck according to your weekly, bi-weekly, or monthly pay schedule followed. The amount owed at that time will equal the principal and all applicable fees and/or interest, as outlined in the terms of the loan agreement signed.

While payday loans generally assess a fixed fee based upon the amount borrowed, rates are set competitively and charges differ depending upon various factors. Rates and fees can be affected by state regulations and where the loan originated, as well as by the chosen type of provider, which can vary from direct lenders and credit access businesses to offshore lenders and lead generators. Some lenders charge origination, early payoff, or other additional fees. It is the borrower’s responsibility to understand all terms and costs associated with their advance before signing the agreement.

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Options for Past Due Payment

Whenever a borrower anticipates that they won’t be able to repay their advance as scheduled, they should contact their lender before the loan due date to explore possible solutions for preventing a default. Extended payment plans that enable the consumer to pay off the loan over several weeks with no additional costs are provided in some states and by all lenders that belong to the Community Financial Services Association (CFSA). Another option sometimes available is payday loan refinancing. Under a refinancing agreement, only the initial fees are paid on the original due date, while the principal and reassessed fees roll over to a new term.

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