The Loan Process

Borrowers visit a payday lending store and secure a small cash loan, usually in the range of $100 to $500 with payment in full due at the borrower's next paycheck (usually a two week term). Finance charges on payday loans are typically in the range of $15 to $30 per $100 borrowed, which translates to rates ranging from 390 percent to 780 percent when expressed as an annual percentage rate. The borrower writes a post-dated check to the lender in the full amount of the loan plus interest and fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower doesn't repay the loan in person, the lender may process the check traditionally or through electronic withdrawal from the borrower's checking account.

If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay.

Payday lenders generally do little due diligence to assess a borrower's ability to repay a loan, but many do require the borrower to bring one or more recent pay stubs to prove that they have a steady source of income.

Most payday borrowers are not able to repay their loans loan in full at their first paycheck, and will renew the loan, which is the practice of renewing a loan at maturity by paying additional fees without any principal reduction.

Payday lenders typically operate small stores or franchises, but large financial service providers also offer variations on the payday advance.