How do Payday Loans work?

How do Payday Loans work?
Stacey Corrin
How do Payday Loans work?

If you’re considering taking out a payday loan, it’s important to know what you’re applying for. Understanding how payday loans work is the best way of making the right choice.

What are Payday Loans?

This form of finance is generally referred to as short term loans, typically for relatively small amounts. Interest rates are usually high, in comparison to other types of credit.

The true definition of it is one that is offered over a month. It originates from the fact that the borrower pays the money back on their next payday. Nowadays, most of these loan terms vary between 2 and 6 months.

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What does the application process involve?

Applying for most short-term loan options is usually a relatively simple process. Often, borrowers can apply online without having to speak to another human being.

In a majority of cases, decisions are made online. Most affordability assessments can be automated.  Lending guidelines lenders need to follow are strict but clear.

When you apply you’ll need to provide bank details and information about income and expenditure, as well as your personal details.  The vast majority of regulated lenders provide an easy to use online calculator. These tools estimate the overall cost of your loan and how much you’ll pay back in each instalment.

How is your credit paid back?

Once you’ve received the funds, you’ll have a short break before it needs to be repaid. You’ll then be expected to pay your loan back as a one-off repayment, or in smaller instalments.How do Payday Loans work?

Most providers accept loan repayments using Continuous Payment Authority, or CPA. This allows them to take the money directly from your bank account on the agreed date. This will also allow you to change the amount month by month if your installments vary. You can cancel the CPA at any time, but will still be responsible for your debts.

Is the high-credit cost industry regulated?

Lenders are regulated by the Financial Conduct Authority, as are loan brokers.

You can search the Financial Services Register, to examine the companies you deal with. They must be officially registered and approved.

The Financial Conduct Authority continually regulates all registered companies.  Working on behalf of the consumer, to protect you from unfair treatment. Lenders and brokers need to be responsible and honest. Lenders need to provide full disclosure about costs. They also need to ensure that thorough affordability checks are carried out.


When looking at how payday loans work, it is important to understand they are high-interest credit options that are not intended for long-term or repeated use. You’ll pay interest by the day on the money that you’ve borrowed.

Some providers charge fees for late repayment. Many responsible lenders have removed these from their agreements.

There are often cheaper ways to borrow, but there are benefits too. The benefits come in the form of:

  • Clear pricing
  • Set repayment dates to encourage you to clear your debt
  • Fast deposit times with money often sent to your bank the same day or within hours

You should only take out any loans if you know that can repay it on time.

Remember that unexpected costs can arise at any time. Always look ahead and think not just about whether you’ll have the money available.

You also need to think about what you’ll do if something else goes wrong. If you’re taking out a loan to pay unexpected bills this month, could you still afford to pay it back if your car broke down next week?