How to payday loans work? Here's all you need to know

A woman holding an empty purse

Instant payday loans are an expensive, albeit increasingly popular method of borrowing money until payday. There are several things you should be aware of before looking at payday quotes or emergency loans as they’re not always as straightforward as you might think.

Payday loans online are one of the quickest and easiest ways of obtaining instant money, but you’ve always got to ensure that you can make the repayments on your payday money loan - otherwise, you can face serious financial consequences.

In this guide, you’ll find out more about high acceptance payday loans, how you can get payday loans with bad credit and how to find instant payday loans, as well as all the risks associated with them.

What is a payday loan?

A payday loan is essentially a short-term loan for relatively small amounts of money; they’re intended to help tide you over until you get paid, whether that’s at the end or the beginning of the month - whenever your payday falls.

Payday loans provide you with almost-immediate cash so that you can afford to buy things if you’re short of cash before payday.

How do payday loans work?

They work by the money being paid directly into your bank account from the loan provider, and then you have to make the repayments on the loan, with added interest, over a pre-agreed period of time.

While the term ‘payday’ loan suggests that you have to pay the money back before or on payday, you can actually get some payday loans that allow you to borrow money for longer periods of time, such as 3 months at a time.

Some payday loan lenders will let you agree upon a repayment period, but some lenders will require you to pay back the loan with added interest before payday.

As payday loans are short-term and high-cost, they can actually get you into even more financial trouble, especially if you cannot afford to make the repayments within the repayment terms. Therefore, you need to very carefully consider the pros and cons of taking out a payday loan before you commit to a deal, so that you’re confident in your ability to make the repayments.  

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What is a legit payday loan site?

If you’re thinking about taking out a payday loan, it’s imperative that you carry out sufficient research to ensure that you choose a legitimate payday loan site.

Some scammers can be very convincing when it comes to posing as a payday loan site and even the sites that seem to be legit might be charging you extortionate fees or ridiculous repayment terms, so you always need to conduct thorough research before committing to a loan provider.

One of the best ways to check whether a payday lender is legitimate or not is to check if they carry out a credit check on you. While some lenders will advertise “payday loans with no credit check”, these “lenders” aren’t actually lending money responsibly as they’re not checking whether you can afford to pay back the loan.

You might be tempted by these kinds of payday lenders if they claim that you won’t be credit checked and it won’t go against your credit score, but it’s a very irresponsible way of lending money, so you should avoid them where possible.

Does it affect your credit score?

Most payday lenders will carry out a “soft search” check which isn’t likely to affect your credit score, but if you then decide to apply for a loan, a note will be made on your credit report so that other lenders in the future can see which could impact your eligibility to apply for another type of loan.

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What is a bad credit payday loan?

A bad credit payday loan is designed for people with a poor credit rating; it is essentially the same as a regular payday loan in that it allows you to borrow money on a short-term, high-cost basis but it’s for people who have a bad credit rating. To increase yours, read our guide on how to boost your credit score.

Can you be prosecuted for not paying back a payday loan?

While it’s highly unlikely that you’ll actually be arrested for not paying a payday loan back, but you can find yourself in legal trouble and you may even have to attend court in order to settle your payments.

It goes without saying that you should avoid these kinds of eventualities so that you don’t run the risk of getting into more debt and facing legal action if you fail to pay back your payday loan.

Are payday loans a good idea?

Determining whether payday loans are a good idea or not is based on individual circumstances and financial situations.

However, it can be agreed that they should be avoided where possible as the interest rates on payday loans can be extortionate and there are many other means of borrowing money if you need to do so.

Alternatives to payday loans

If you feel like you really need to borrow money, but you’re not 100% sold on the idea of payday loans, then you’ll be glad to know that there are many alternatives to payday loans that you can look into.

  • Borrow money from friends or family - this can sometimes cause difficulties with relationships, however, but if you’re confident in your ability to repay them, this might be an option you want to consider.
  • Try and extend your overdraft if possible.
  • Apply for a loan with your credit union.
  • Use a credit card - but be aware of the payment terms and interest rates.
  • Try to seek help from your local welfare assistance scheme.
  • See if you’re eligible for an interest-free loan from the Social Fund.

Whichever method you choose to borrow money, it’s imperative that you’re aware of all the risks associated with doing so and that you’re able to pay back the money you borrow within the agreed-upon period of time so that you don’t face any other financial consequences.

For more advice, take a look at our handy guides below.

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