You see them advertised on television, on billboards, and over the radio, but does anyone really know what a payday loan is and how it works? Sure, the masculine voice shouts “Need Cash Now!” but where does the money come from, how do you apply for it, and what is the catch?

A payday loan is typically a small loan to offset costs until your next paycheck. These loans are usually given to individuals who do not have enough money in their bank account or credit cards to cover essential items and/or pay bills. Most loans require a short repayment window, which corresponds to your next payday. The loan company collects your bank account information to pay you, but also deducts the repayment amount on the specified date.

When you take out a payday loan, you enter into a financial contract with the company, which states you will repay them X amount on X date. Some companies allow you to split the payments over several months, but most payday loans are due in full a month or two later. The key term is “payday,” so the company expects their money when you receive your next paycheck.

The amount of your payday loan is determined by necessity and credit history. You will always repay more than you borrowed, which is referred to as “interest.” For example, if you had a payday loan of $600, your repayment amount could be as high as $750. The finance charges and interest rates correlate to what you would pay for a cash advance. Remember, you are saving hundreds of dollars on late payments, overdraft charges, and other delinquencies.

When you are having financial problems, payday loans are a viable solution to most short-term situations. With these loans, you can keep your bank account afloat, pay down bills, and purchase essential items until your paycheck arrives.