We take a look at how payday loans work

How do payday loans work?

The premise of a payday loan is very simple. It is a loan you take out before your wages are paid, to cover those last few days when money might be low or you need to deal with an emergency expense. Here’s a step by step guide to the payday loan process.

Step One – Self-evaluation

If you’re thinking about a payday loan, you must first consider if you are eligible. You should also check that your credit score is healthy enough to apply without damaging your rating if you are not accepted. The same rule applies if you’re considering a short-term loan, like those available through Sunny.

Step Two – Application

Next, you will apply for the payday loan in the amount you require and the lender will confirm if you are accepted or not. They will conduct credit and affordability checks to determine whether you are able to pay back the amount borrowed or not.

Many lenders require that you apply online and some offer a soft credit check to determine how much you are likely able to borrow. Sunny’s broker partner works with a panel of lenders that provides such a service. They can check your credit history and confirm the value of the loan you’re likely to be accepted for. This doesn’t leave a marker on your report and gives you an idea of whether you should go ahead and submit a full application or not.

Step Three – Payment agreement

Most payday lenders require payment within 35 days and if you have accepted their loan offer they will now confirm when your payment will be taken. This amount should include interest and it’s important you now consider how you will ensure you have enough money to cover it.

Step Four – Money received

You will receive your loan and are now able to use it for that emergency expense or to cover an end of the month bill. The loan will usually be paid directly into your bank account for you to access as needed. You can send the money via bank transfer to the payee or even take it out as physical cash at an ATM to cover a cost.

Step Five – Payment is taken

On the date you agreed earlier, the payday loans company will take payment. Ensure you have enough money in your bank account on this date to cover the cost and to avoid rolling your payday loan into the next month, which can lead to a cycle of debt that is hard to recover from.

If you were to opt for a short-term loan instead that can be paid in instalments, you could have a longer repayment period that could help you balance your budget and spread the cost of your borrowing.