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A payday loan is a type of short-term loan normally extended on a very high-interest basis. Because of their higher than usual interest rates, loans like payday loans have  been made illegal in several states (in sixteen states, to be precise), so always check your state regulations before even considering taking one out.

If they are legal in your state and you decide to withdraw one, you must make sure to find out how you repay these loans. Although each lender will have their own requirements, some more general rules can be applied when it comes to repaying a payday loan. 

The Nature of Payday Loans

Payday loans are a kind of unsecured personal loan, meaning they do not need the security of collateral in order to be withdrawn. Payday loans are extended based on your income and, as such, they typically require a pay stub to be applied for. 

Because these loans do not require collateral or sometimes not even a good credit score, payday lenders take on a lot of risk by not doing anything to check a borrower’s ability to repay the loan. As a result, they charge very high-interest rates.

How Your Payday Loan Can Be Repaid

Payday loans typically have a repayment term of 30 days, though, of course, the exact term will vary from lender to lender. You will be expected to make your repayment plus interest at the end of this time. 

If at the end of your term you have the funds to repay your loan plus interest, the most common way to pay back a payday loan is through your debit card. When you get the loan, you will have agreed to let the lender take the money at the end of your term straight from your given account ; this is called an Automated Clearing House Automation (ACH).

However, if at the end of your term you find you do not have enough in your account to pay back your loan, high fees can be charged for missing your repayment.

Your lender may also suggest a new date for you to repay the loan which will give you more time to gather the necessary funds. You should however note that this will cause the accumulating of lots of extra charges. 

If you continue to default on your loan, your lender will persist in attempting to collect payment from you for about 60 days. If you are still unable to pay after this point, they’ll likely turn to a third-party debt collection agency to chase you until they receive the money. 

You may even be summoned to court by your collection agency if you default on your loan and, of course, your credit score will be notably damaged.

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Payday lenders in the USA will typically take their monthly repayment via ACH authorisation

Potential Dangers When Repaying A Payday Loan

Payday loans can be difficult to repay for some people, so even if you understand the process of doing so, it can still be a very difficult task to accomplish, whether you have borrowed $100 or taken out a $1000 loan, or perhaps even more.  These loans have in some cases been regarded as a form of predatory lending when not treated properly, as they have extremely high interest, do not consider a borrower’s ability to repay the loan, and sometimes charge a borrower with hidden fees.

The result of this is can be falling into a debt trap for customers. Because of this, you should only take out a payday loan if you have a solid repayment plan and are absolutely certain you will be able to repay the loan on time and plus interest.

Remember, the term of a payday loan is typically just one month, so think about it; if you do not currently have money to cover your costs, will you have the money plus enough to repay your payday loan and its interest in just 30 days?

Potential RiskReason
May fall victim to predatory lendersLike any loan, you run the risk of falling for loan sharks and unscrupulous lenders
Additional feesPayday loans come with additional fees you should always consider
You don't have enough money to repayIf this happens, you will end up being charged additional fees and will fall into further debt
Higher interest ratesThe higher interest rates on payday loans make them potentially more expensive than other loans
Money is borrowed for a short periodBecause a payday loan is borrowed for a short period of time, you need to know you will have the money to repay it

Some alternatives to consider before taking out a payday loan are:

  • Ask for an advance on your salary
  • Use any equity you have built up in your home
  • Borrow from family or friends
  • If you are short of cash because of debt, try to negotiate a new repayment plan to prevent you from needing to take out a payday loan 

If you cannot exercise any of these alternatives, you may need to take out a payday loan. Just ensure to only borrow from a reputable, well-established lender and go into the process with a reliable repayment plan in place.

Alice Busvine

Alice is a writer focusing on consumer and lending practices throughout the USA.