The payday advance application process is fast and simple. It usually requires only a few supporting documents, including proof of a regular income, a personal checking account and identification.

Borrowers visit a payday lending store or site and secure a small cash loan, due in full at the time of the borrower's next paycheck (normally two weeks). The borrower pays a finance charge usually between $15 to $30 for every $100 borrowed. In return the borrower writes a check to the lender covering the loan amount plus fees; often this money is deducted electronically from the borrower's checking account.

Payday lenders generally require the borrower to bring recent pay stubs to prove that they have a steady source of income, as well as recent bank statements. Applicants can avoid some of these requirements by applying via the Internet at one of the growing list of payday advance sites.

If approved, the loan is deposited directly into the borrower's checking account and the loan payment and/or finance charge is electronically withdrawn on the borrower's next payday.

A typical advance falls between $100 and $500, though borrowers with good repayment records can receive up to $1500 overnight*. There is cost in return for convenience, as loans generally have interest rates in the range of 390 percent to 780 percent.

Still, even though lenders can garner such rates for their services, the borrower is not without protection. For example, Congress passed a law in October 2006 that caps lending to military personnel at 36% APR.
Some legislators are looking to apply this kind of protection to the general public, claiming that such predatory lending practices hurt the lower-earning classes who can least afford it.

*A survey of 100 internet payday loan sites found loans from $200 to $2,500 were available, with $500 the most frequently offered. Finance charges ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in two weeks. (Source: The Consumer Federation of America)

Note: in some states, extending (or "rolling over") the loan is prohibited; other states allow for extended payment plans.

They may have a point: a study by the Center for Responsible Lending showed that the majority of lenders' profits came from repeat borrowers who did so to meet their original loan obligations, and wound up paying fees each time.

Regulators generally are wary of payday loan practices, and this booming industry is the focus of legal struggles. This has resulted in a tug-of-war between lobbyists, some working to enable payday lending, others fighting to prohibit high-cost loans in the name of protecting the consumer.

Right now, payday lending is legal in 37 states. The rest have declared it illegal outright, or have passed laws with hard interest-rate caps that make it much less attractive to do business.

Of course, lenders have found ways around these discouragements. Under the legal doctrine of rate exportation, established by Marquette Nat. Bank v. First of Omaha Corp. 439 U.S. 299 (1978), the loan is governed by the laws of the state the bank is chartered in. Thus, payday lenders have forged relationships with banks from states without usury laws, such as Delaware (the same thing credit-card lenders have done); this way, they can offer loans which exceed the APR ceilings imposed by most states in the country. In response the FDIC has created guidelines which transition to a longer-term loan APRs after 6 payday loan renewals -- in order to discourage long-term debt cycles.
Likewise, some states now have laws limiting the number of loans a borrower can take at one time.

Some states also have limits on the number of loans permitted to be taken out per year (though borrowers have gotten around this by taking out loans from multiple lenders). Whatever the case, for laws to be effective, they need to include loan fees -- to prevent lenders from charging them and still claiming a low interest rate.

Some states have already cracked down: on March 1, 2006, the North Carolina Department of Justice announced the state had negotiated agreements with all the payday lenders operating in the state. North Carolina maintained that the practice of funding payday loans through banks chartered in other states illegally circumvented state laws. Lenders were forced to stop making new loans, agreed to collect only principal on existing loans. Plus they agreed to pay $700,000 to non-profit organizations for relief.

Georgia went even further, in 2004 making payday lending a felony, which included racketeering charges and the allowing of potentially devastating class-action lawsuits. Likewise, in 2007 New Mexico began capping fees, total number of loans by a consumer, and forbade immediate loan rollovers. Plus, a borrower unable to repay a loan is automatically offered a 130-day payment plan, with no fees or interest. And in January of 2008, the District of Columbia capped the interest rate on payday loans at 24 percent -- the same maximum rate for banks. The District also now requires payday lenders to be licensed.

The Canadians have weighed in too: in 2006, the Supreme Court of British Columbia ruled against a well-known lender in a class action lawsuit. Said lender charged its customers 21% interest, as well as a "processing" fee of C$9.50 for every $50.00 borrowed. The judge ruled that such fees were actually interest, and that the interest rate was of criminal proportions. Payout is expected to be several million dollars.