Understanding the Advance Payment Process

Learn about how advance payments work and why they can be costly if not repaid on time.

Understanding the Advance Payment Process

A payday loan is a type of short-term loan that can help you cover your immediate cash needs until you receive your next paycheck. These small, high-cost loans usually come with triple-digit annual percentage rates (APR) and payments are typically due within two weeks or close to your next payday. Payday loans are also known as cash advance loans or check advance loans. Payday loans are a fast way to get small amounts of money, but they come with high interest rates.

If the loan is not fully repaid by the due date, additional fees are usually charged and the due date is extended. This can lead to a vicious cycle of reactivation, resulting in more and more fees. Some states do not allow payday loans because they are not allowed by state law or because payday lenders have chosen not to do business at the interest rate and fees allowed in those states. Payday lenders offer short-term loans at interest rates higher than the short-term market to customers, including business owners, who may otherwise have difficulty obtaining funds for urgent expenses.

Depending on where you live, you can get a payday loan online or through a physical branch with a payday lender. The Consumer Financial Protection Bureau (CFPB) found that 20% of payday borrowers defaulted on their loans and more than 80% of payday loans contracted by borrowers were extended or re-borrowed within 30 days. Payday loans are made at payday loan stores or in stores that sell other financial services, such as check cashing, title loans, rent-to-own, and pawns, depending on state licensing requirements. For example, if you are suddenly a couple hundred dollars short of paying a business obligation but know that a big customer will pay you enough to cover the payday loan next week, you could apply for a payday loan to cover your check.

Payday lenders serve customers who need money quickly and can't get money from banks or credit cards. To enter the business of payday advances yourself, you can buy an existing trade or open your own. The Military Lending Act (MLA) provides expanded protections for military personnel and their families, including a 36% Military Annual Percentage Rate (MAPR) cap for a wider range of credit products such as payday loans, vehicle title loans, application loans, deposit advance loans, installment loans and lines of credit open without guarantee. Depending on your state's law, payday loans may be available through payday lenders in stores or online.

Because payday lenders often don't perform a credit check, applying for a payday loan doesn't affect your credit score or show up on your credit report. You may think that a payday loan is the only solution to handling an emergency bill or even to pay off another debt, but the truth is that a payday loan will end up costing you more than the problem you are trying to solve.

Ebony Sandoe
Ebony Sandoe

Alcohol maven. Freelance web scholar. Professional zombie specialist. Professional web practitioner. General bacon maven.