With a payday loan the borrower gives the lender items such as a paycheck stub, photo id and a bank statement. The borrower writes a check to the lender for the amount and the lender's fee. Under law in some states, the lender's fee is limited. The lender agrees to hold the check until the customer's next payday, up to 30 days.

At that time, the borrower may redeem the check with cash, allow the lender to deposit the check or rollover the loan by paying another fee.

If you are considering a payday loan you should be aware of the risks and responsibilities involved with this sort of lending.

Here is a typical example of how a payday loan works:  the borrower requests a loan for a short period of time, usually one to four weeks.  They provide the lender with proof of employment and identification.  In exchange for cash, they leave a postdated check with the lender that includes the “payday loan fee”.  The cost might seem low; maybe the borrower paid $115 to borrow $100 for two weeks.  While this may not seem like much, if you calculate the loan cost in terms of APR (annual percentage rate) that $15 explodes to 360 percent interest.

If the borrower continues to have financial problems and cannot payback the loan as promised, the interest keeps building and so does the debt.

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