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Borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower's next paycheck (usually a two week term). In the United States, finance charges on payday loans are typically in the range of 15 to 30 percent of the amount for the two-week period, which translates to annual percentage rates (APRs) from 390 to 780.^[1] The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower does not repay the loan in person, the lender may redeem the check.

Payday lenders require the borrower to bring one or more recent pay stubs to prove a steady source of income. The borrower is also required to provide recent bank statements.^{[citation needed]} Individual companies and franchises have their own underwriting criteria.

Online payday loans are marketed through e-mail, online search, paid ads, and referrals. Typically, a consumer fills out an online application form or faxes a completed application that requests personal information, bank account numbers, Social Security number and employer information.^{[citation needed]} Borrowers fax copies of a check, a recent bank statement, and signed paperwork. The loan is direct-deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday.^{[citation needed]}

According to the Criminal Code of Canada, any rate of interest charged above 60% per annum is considered criminal. On August 14, 2006, the Supreme Court of British Columbia issued its decision in a class action lawsuit against A OK Payday Loans.^[6] A OK charged its customers 21% interest, as well as a "processing" fee of C$9.50 for every $50.00 borrowed.^[6] In addition a "deferral" fee of $25.00 for every $100.00 was charged if a customer wanted to delay payment. The judge ruled that the processing and deferral fees were interest, and that A OK was charging its customers a criminal rate of interest. The payout as a result of this decision is expected to be several million dollars.^[7] The British Columbia Court of Appeal unanimously affirmed this decision.^[8]

The small loans market in Australia was estimated in 2008 to be between $800m and $1bn a year,^{[citation needed]} although it seems likely that the true market was and currently is higher than this.

In the US, although payday lending is primarily regulated at the state level, the United States Congress passed a law in October 2006 becoming effective on Oct. 1, 2007 that caps lending to military personnel at a maximum of 36% APR as defined by the Secretary of Defense.^[28] The Defense Department called payday lending practices "predatory", and military officers cited concerns that payday lending ruined low-paid enlisted men and women's finances, jeopardized their security clearances, and even interfered with deployment schedules to Iraq.^[29]

Some federal banking regulators and legislators seek to restrict or prohibit the loans not just for military personnel, but for all borrowers,^[30] because the high costs are viewed as a financial drain on the working and lower-middle class populations who are the primary borrowers.