What are paycheck advance loans?

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A paycheck advance loan, sometimes called a payday or cash advance loan, is a loan providing short-term funds to a borrower with repayment terms based upon the borrower’s pay period. The loan is typically paid in full with a portion of the next paycheck the borrower receives.

A payday or paycheck advance loan is typically an unsecured loan, which means that no additional collateral is required or needs to be pledged to the lender as part of the loan agreement.

Qualifying for a paycheck advance loan is relatively simple. And while some paycheck advance lenders will require a credit check, the credit standards are much more flexible, particularly when compared to conventional financing from banks or credit unions.

Characteristics and features of paycheck advance loans

In addition to the much shorter term, a paycheck advance loan is also characterized by smaller loan amounts. Because paycheck advance brokers and lenders want to ensure that the borrower has the ability to “safely” repay the loan with the next paycheck, the loan amount is typically a percentage of the borrower’s regular take-home pay. The exact percentage will vary according to lender guidelines and the borrower’s specific history, but payday lenders will limit their loans to a small percentage of the borrower’s next projected take-home wages or salary.

Paycheck advance loans offer many consumers three primary advantages:

  • Speed. Payday loans can be processed very quickly. Depending on the lender and borrower, payday or cash advance loans can be approved and funded in hours, rather than days.
  • Credit flexibility. Cash advance loans use more flexible credit guidelines, allowing them to approve and finance many consumers who would otherwise be declined by traditional banks. Payday lenders still require some sort of credit check, but their financing models allow them lend money to many borrowers with less-than-perfect credit.
  • Convenience. With the emergence of online lending, many consumers can now obtain a payday advance loan via the internet – without having to visit an actual payday lender facility. So borrowers can apply for and get approved for a loan from the comfort of their own home, 24 hours a day. The funds can then be wired directly to the borrower’s checking account.

A paycheck advance lender will typically require a completed loan application and a copy of the applicant’s most recent paycheck stub or bank statement. Online lenders allow consumers to complete the entire loan application and choose eligible loan terms via the lender’s website. The paycheck stub should reveal the gross and net income for the application for the recent pay period. The paycheck stub should also provide a year-to-date income total as well. The applicant is also required to have an active checking account.

The borrower can then set up an auto-debit to the lender for a predetermined amount in the future. In fact, many lenders encourage it as it helps to ensure timely repayment. This repayment period is typically associated with the borrower’s next pay day. On or immediately after the following payday, the loan is repaid by a check or auto-debited from the borrower’s account. A paycheck advance loan can be repaid at the next pay period or over several pay periods, based upon the loan agreement.

Paycheck advance loans do give borrowers the option to extend their repayment period. There is sometimes a fee for this, but this may be a necessary option for borrowers who find that they need more time to pay off the loan.

Paycheck or payday advance loans generally carry a high APR or annualized interest rate and are not for everyone. But they do provide another option for consumers, especially when emergency funds are needed and speed is a priority.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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