How do online payday advances work?

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In a Nutshell

Getting a payday advance — also known as a payday loan — online can be convenient if you need fast cash and your credit isn’t great. But the fees on these loans tend to be sky-high and, when you get a payday loan, it’s easy to get trapped in a cycle of debt. You should turn to payday loans only as a last resort.
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If you’re living paycheck to paycheck — like many Americans — what happens when you need money for sudden expenses?

As you weigh your options, you might consider borrowing money through an online payday loan lender. Here’s what you need to know before you choose that option.

What are online payday advances?

You can get payday loans from payday lenders at storefronts. If you want to get a payday loan, you can go to a physical establishment and apply for a loan, which may require you to give the lender a postdated check to cover the loan amount plus fees.

As the name indicates, the payday cash advance can help tide you over until your next payday. Most of these payday advances — also known as deferred deposit loans, payday loans and check advance loans — are short-term loans for small amounts, often $500 or less.

Getting a payday advance online is similar, but you are entering into the transaction online instead of in person. Be aware that you may be asked to authorize an automatic electronic payment from your bank account for the repayment.

How online payday advances work

It’s easy to find lenders who offer online payday advances. To qualify for an online payday advance, lenders’ requirements may include U.S. citizenship or permanent resident status and that the borrower be at least 18 years old.

Here is some of the information you may need to provide during the application process.

  • Your name, address and contact information.
  • Your employment and income information, including when your next payday is. You may need to provide documents verifying your income.
  • Your checking account, including account numbers.

These online loans can often be approved quickly — sometimes even without a credit check — and funds may be available by the next business day through direct deposit into your bank account.

While it seems as if online payday advances make it easy to get cash quickly, these loans are not available in all states — some have banned payday loans outright.

Proceed with caution

While it may be easy to get a payday advance online, potential borrowers should be cautious.

Payday loans typically come with fees that equate to shockingly high interest rates. Calculating the equivalent annual percentage rate enables you to compare lenders on an equal footing and pick the lender that gives you the best terms.

It’s common for payday loans to charge fees ranging from $10 to $30 for every $100 borrowed. Say you take out a four-week payday loan for $200. If the lender charges $20 in fees for every $100 borrowed, you’ll end up paying $240 altogether. To put the fees in terms of APR, you’d be paying interest at a rate of more than 260%.

You’ll want to keep in mind that when your loan repayment is due — on your payday — you will be short the $240 you owe for the loan and fees. If you’re already living paycheck to paycheck, this shortfall could leave you strapped for cash. You could end up having to borrow more money to cover the deficit and pay your bills. Your lender could offer to extend, or “roll over,” your loan if you can’t afford to pay it back.

If your state law permits rollovers, you may be required to pay your fee on the original amount owed and a new fee to extend the terms. If your rollover fee is $40, you’ve now been charged a total of $80 in fees. Plus, you’ll still owe the original amount borrowed, bringing your total amount owed to $280.

Payday loans are expensive, and they don’t offer a long-term financial solution. While you’re working to pay off a payday loan, you might not even be earning enough money to cover the additional fees. That’s how this sort of financing arrangement can trap you in a debt cycle.

What are some alternatives to payday loans?

Payday loans can trap you in a cycle of debt. Before you decide to apply for one, consider some alternatives, like …

Learn more about the dangers of payday loans.

Bottom line

Getting a payday advance online should be a last resort. If you have no other choice for your short-term financial needs, take the time to shop around and compare terms from different lenders.

If you’re living paycheck to paycheck and you have a financial emergency, it could be hard to avoid getting stuck in a cycle of debt. If you have the resources, consider making a budget and building up your emergency fund. You could also opt for credit counseling to help you organize your finances and learn about building credit — which can give you a chance to get better terms from other types of lenders in the future.

About the author: Poonkulali Thangavelu has 20+ years of financial journalism experience. Her work has appeared with outlets like Bankrate, Investopedia and various national newspapers. Poonkulali holds an MBA in finance and marketing … Read more.