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Online payday loans are short-term, high-interest loans that are designed to help borrowers cover unexpected expenses or emergency costs between paychecks. Unlike traditional loans, which may require a lengthy application process and credit checks, online payday loans are typically easier to obtain and have faster processing times. 

With more than 12 million Americans estimated to take out payday loans each year, it is not surprising that many find it more convenient to apply online than travel to and queue at physical stores. With this in mind, Pheabs reveals exactly how online payday loans work, and the advantages and disadvantages of this form of borrowing.



What Are Payday Loans?


Payday loans offer a quick injection of cash to help borrowers stay financially afloat until their next paycheck arises. Those needing to pay for unanticipated costs such as medical bills, dental fees, home repairs, vet fees, car repairs and funeral costs may look to payday loans as a temporary solution.

To qualify for a payday loan, applicants need to be a US citizen over 18 years of age. They need to earn a regular income of approximately $800 per month and have a bank account for the funds to be deposited into.

Whilst payday loans are available from both physical stores or online platforms such as Pheabs, they are currently only legal in 37 of the 50 US states. Locations include:

  • Alabama
  • California
  • Delaware
  • Florida
  • Idaho
  • Illinois
  • Indiana 
  • Kentucky
  • Minnesota
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • Ohio
  • Oregon
  • Tennessee
  • Texas



How Do Payday Loans Online Work?


To borrow a payday loan online, you can follow the steps mentioned below: 


1. Research and Choose a Lender


The first step in obtaining an online payday loan is to research and choose a lender. There are many online lenders that specialize in payday loans, so it is important to compare rates, terms and fees to find the best lender for your needs. Look for a lender with a good reputation and positive customer reviews.

You can also go through brokers such as Pheabs which works with over 50 reputable lenders across the US to source the most competitive rates for its customers. Better yet, Pheabs’ service is free of charge and enquiring has no impact on applicants credit scores.


2. Complete the Application


Once you have chosen a lender, you will need to complete the online loan application form. This may involve providing basic personal and financial information, such as your name, address, income and checking account details. Some lenders may also require proof of income or employment, such as a pay stub or bank statement.


3. Receive Approval and Loan Terms


After you submit your application, the lender will review it and determine whether you are eligible for a loan. If you are approved, the lender will provide you with the loan terms, including the loan amount, interest rate, fees and repayment schedule. It is important to carefully review these terms and make sure you understand them before accepting the loan.


4. Receive Funds


Once you have accepted the loan terms, the lender will transfer the funds to your bank account. This typically happens within a couple of hours or 1 to 2 business days, depending on the lender and your bank’s processing times. 


5. Repay the Loan


Repaying the loan is typically done by allowing the lender to withdraw the loan amount, plus fees and interest, directly from your bank account on the due date. This is typically done through a post-dated check or an authorization for automatic electronic funds transfer. 

If you are unable to repay the loan on time, you may be able to extend the repayment period by paying additional fees and interest. Get in touch with the lender immediately to discuss this or a more flexible repayment plan as otherwise missed repayments could damage your credit score and make it more difficult to borrow money in the future.


6. Repeat the Process


If you need to borrow additional funds in the future, you can repeat the process by applying for another online payday loan. However, it is important to be careful. You must not borrow money to pay off previous loans as this could lead to a cycle of debt involving lots of fees and interest charges.  


What Are The Advantages and Disadvantages Of Online Payday Loans?


Like any financial product, online payday loans come with both advantages and disadvantages. Here is a closer look at the pros and cons:


Advantages Disadvantages
Quick and Easy Application Process – Online payday loans typically have a simple and streamlined application process, which can be completed from the comfort of your own home. Many lenders offer instant approval and can transfer funds directly to your bank account within minutes, hours or by the next business day. High Fees and Interest Rates – Online payday loans typically have much higher fees and interest rates than traditional loans, which can make them expensive if not repaid on time. In worst cases, borrowers may end up paying more in fees and interest than the original loan amount.
High Approval Rates – Because online payday loans are designed for short-term borrowing, they may have higher approval rates than traditional loans. Even borrowers with poor credit may be able to qualify for a loan, as long as they meet the lender’s eligibility requirements. Short Repayment Period – Payday loans are designed to be repaid in a short period of time, typically within 2 to 4 weeks. This can be difficult for borrowers who are already struggling to make ends meet, and can lead to a cycle of debt.
Flexible Repayment Options – Many online payday lenders offer flexible repayment options, such as installment plans or extensions, which can help borrowers avoid late fees and penalties. Risk of Predatory Lending – Some online payday lenders engage in predatory lending practices, such as charging excessive fees, using aggressive collection tactics or offering loans that are difficult to repay. It is important to research and choose a reputable lender with transparent terms and fees.
Convenient Access – Online payday loans are available 24/7, which means you can apply at any time, including weekends and holidays. Impact on Credit Score – Failing to repay a payday loan on time can negatively impact your credit score. This can make it difficult to obtain credit and favorable terms in the future.


What Are Alternatives To Online Payday Loans? 


When considering an online payday loan, it is also important to explore alternative options. Low interest card cards or personal lines of credit may be better options for short-term financing. Providing that you created a formalized agreement, you could also consider borrowing from friends or family which could be a cheaper option without any interest or administration fees.

Additional options include requesting an authorized overdraft from the bank or seeking assistance from a non-profit credit counseling agency. You could also look to sell items you no longer need via a yard sale or online platforms such as eBay or Vinted.



Concluding Thoughts


In conclusion, online payday loans can be a quick and convenient way to obtain short-term financing, but it is important to carefully consider the risks and alternatives before accepting the loan. Only borrow what you can afford to repay, and choose a reputable lender with transparent terms and fees. With responsible borrowing and careful management, online payday loans can be a viable option for short-term financing.

Justine Gray

Justine Gray is a contributor to Pheabs, sharing more than 10 years of experience in the consumer finance industry across the US. Follow her guides for financial advice, money saving tips and more. Follow them on Linkedin and Youtube.