What Are Online Payday Loans and How Do They Work
Unforeseen costs are a hassle, and many people opt to borrow a payday loan online to handle the problem. These services provide immediate access to funds and a fast process. However, before you apply, it is important to understand what these cash advances are and how they work. See our payday loans page for information about requirements and timing.
What Are Online Payday Loans?
Online payday loans are small loans that you can obtain through websites and mobile applications as opposed to going to a physical location. Unlike traditional banks, where a loan application may take several days to process, these online lenders can approve loans of anywhere between $100 and $500 within minutes.
These loans are to be paid back in a relatively short period of time, usually in two to four weeks or about the time of your next payday. The lender deposits the money directly into your bank account and then has the ability to withdraw the total amount due on the agreed-upon date. Most payday lenders do not do thorough credit checks, which is a plus for those borrowers who may not have perfect or long-term credit histories.
How Online Payday Loans Work
Let’s examine how online payday loans generally work. It is a matter of understanding the application process and how you pay the loan back. The whole system is geared toward speed, using technology to enable lenders to process high volumes of applications in a short time.
The Online Application Process
The online application is built for speed, usually taking about 5 to 15 minutes to complete. You will probably be asked for information about:
- Full name and home address.
- Birth date and some form of government-issued identification number.
- Your social security number.
- The name of your employer, their phone number, or mailing address.
- A recent pay statement or some other evidence of income.
- The routing number of your bank and your private account number.
- Phone number and email address where you can be reached.
- Your authorization for the lender to deduct the loan amount, plus fees, from your account on the due date.
Most modern sites have advanced tools that connect to information on banking and payroll. This provides them a means of quickly verifying income and establishing identity in a very short time, often in a matter of minutes.
Funding and Repayment Process
After approval, the money is generally available in your bank account within one to two working days.
Suppose you want to borrow $500 online. The lender may charge you a finance charge of $75 for a two-week loan term. You will receive the $500 immediately. Then, in two weeks, the lender will automatically withdraw $575 from your checking account to cover the loan and the finance charge.
What Happens When a Draft Fails
If you do not have enough money in your accounts, the lender may try to withdraw the money again. Depending on the rules of your bank, this may create overdraft fees. Although there may be regulations limiting the number of consecutive attempts of a lender to withdraw money without renewed authorization from you, failed attempts for payment can result in additional costs to you.
Why Payday Loans Can Be Expensive
Payday loans can be much more expensive than other forms of borrowing, so understanding all the costs involved before getting one is very important.
| Loan Type | Typical APR Range | $500 Loan Cost (2 weeks) |
|---|---|---|
| Online Payday Loan | 300%–400% | $75 fee |
| Credit Card | 12%–30% | $5–$15 interest |
| Credit-Union Personal Loan | 8%–18% | $3–$8 interest |
| Bank Personal Loan | 6%–25% | $2–$12 interest |
Normally, payday loan customers pay about $520 annually in fees and remain in debt for more than five months on average. This is primarily because they cannot afford to pay off the total loan amount by the prescribed date and are forced to take out further loans or pay fees in order to receive an extension in the repayment period.
About 16 states require payday lenders to offer free EPPs (extended payment plans) to borrowers who cannot pay by the due date. These plans generally allow the borrower to pay off the loan in installments without incurring additional charges.
Some states (e.g., Oklahoma and Michigan) allow payday lenders to charge a fee for this type of extended payment plan. Other states allow for loan rollovers with new fees, which ultimately may result in the borrower paying more in fees than the original loan amount was.
| State | Free EPP Required | Fee Allowed | Rollover Fees Allowed |
|---|---|---|---|
| Alabama | Yes | No | No |
| Michigan | Yes | Yes | Yes |
| California | Yes | No | No |
| Oklahoma | Yes | Yes | Yes |
| Most other states | No | N/A | Yes |
Online vs. Storefront Payday Advances
Online payday loans differ from store loans in several ways that affect both availability and cost.
- Convenience and Availability – Online lenders are open 24 hours (7 days per week) through websites and apps, allowing borrowers to apply from home and avoid a personal visit.
- Fee Structure Differences – Online fees may be higher than store fees because online lenders stretch their operations over a larger territory and have tech costs.
- Regulatory Supervision – Storefronts are required to be run in accordance with the laws of the state in which they operate. Online lenders are often from states with less restrictive regulations, although both federal and state agencies oversee lenders.
- Verification Process – Websites depend on electronic verification, while storefronts use a greater component of personal verification. Both need the same types of primary proof, but the online methods are often completed in a much shorter time.
Summary
Knowing how online payday loans work and what they really are reveals both their speed and their risk. Fast cash with no credit check may solve an unexpected expense, but the high fees and the fact that they have to be paid back in a lump sum make the borrower remain in debt.
Consider other alternatives first, such as credit-union loans, paycheck advances from your employer, or a payment plan with your creditor. If you feel that a payday loan is the way you want to go, borrow only what you can pay in full on the date due to save you extra expense and worry.
Before making any decisions, think of using our loan calculator, which tells you the true cost of borrowing, plus read our FAQ to find out answers to some questions you may have.
References
- Consumer Financial Protection Bureau. (n.d.). New protections for payday and installment loans take effect March 30. https://www.consumerfinance.gov/about-us/blog/new-protections-for-payday-and-installment-loans-take-effect-march-30/
- Pew Charitable Trusts. (2016). Payday loan facts and the CFPB’s impact. https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact
- DebtHammer. (n.d.). EPP payday loan extended payment plans. https://debthammer.org/epp-payday-loan-extended-payment-plans/
- Consumer Financial Protection Bureau. (2023). CFPB finds payday borrowers continue to pay significant rollover fees despite state-level protections and payment plans. https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-payday-borrowers-continue-to-pay-significant-rollover-fees-despite-state-level-protections-and-payment-plans/owl.purdue+1