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A payday loan is a short-term loan that can help you cover immediate cash needs until you get your next paycheck. But while they may seem like a financial lifeline, payday loans often make matters worse for the people who use them.
These loans usually come with sky-high fees and short repayment windows that can pull borrowers into a cycle of debt. Before you consider a payday loan, it's important to understand how they work and what's expected from you in return.
What Is a Payday Loan?
A payday loan is a small-dollar, high-cost loan that may be available online or at a physical branch of a payday lender. These loans typically charge high fees, equivalent to triple-digit annual percentage rates (APRs), and payments are usually due within two weeks or close to your next payday.
Different states have different laws surrounding payday loans, limiting how much you can borrow or how much the lender can charge in interest and fees. In fact, 21 states and the District of Columbia have strong interest rate caps that effectively prohibit high-cost payday loans, according to the Center for Responsible Lending.
How Do Payday Loans Work?
If you're approved for a payday loan, you may receive cash, a check or have the money deposited into your bank account.
In exchange, the lender may have you write a check for the loan amount plus the finance charge, which is based on how much you borrow. The lender will then cash the check on the repayment date, usually within 14 days. Alternatively, you may allow the lender to pull the lump-sum payment from your bank account.
If you can't afford to repay a payday loan, you can renew it or roll it over into a new payday loan. Doing so compounds your finance charges and could create a cycle of debt that's difficult to manage.
Learn more: How Do I Get Out of Payday Loan Debt?
How Much Do Payday Loans Cost?
Payday loan costs are set by state laws, with fees ranging from $10 to $30 for every $100 borrowed. A two-week payday loan typically costs $15 per $100 borrowed. Due to their short repayment terms, though, payday loan APRs often reach 400% or more.
Example: Say you borrow $100 for a two-week payday loan and your lender charges you a $15 fee for every $100 borrowed. That is a simple interest rate of 15%. But since you have to repay the loan in two weeks, that 15% finance charge equates to an APR of almost 400% because the loan length is only 14 days.
By comparison to payday loans, APRs on credit cards typically go as high as 30%, and personal loans typically max out at 36%.
How Much Can I Borrow With a Payday Loan?
State laws dictate how much you can borrow with a payday loan, and a $500 limit is common. Some states set the cap higher, others set it lower and a handful tie the limit to a percentage of your income, according to 2023 data from the National Conference of State Legislatures, the most recent data available.
The wider legal landscape varies just as much. Some states have banned high-cost payday lending or capped rates at 36% or lower, which effectively keeps payday lenders out. Other states still allow these loans with few restrictions.
Why Are Payday Loans Bad?
A payday loan can solve an urgent need for money in an emergency. But in most cases, these loans do more harm than good. Here's why it's generally best to avoid them:
- They're expensive. With APRs that often reach 400% or more, payday loans are arguably the most expensive type of loan you can get. If you roll over or renew your loan, you'll face compounding costs.
- They're difficult to repay. Although payday loans are typically small, payment is often due within just a couple of weeks, giving you little time to fix your financial problems. In fact, more than 80% of payday loans are rolled over or renewed within two weeks, according to the Consumer Financial Protection Bureau (CFPB).
- They don't help your credit. Payday lenders may not require a credit check when you apply, but they also don't report your payments to the credit bureaus. If you fail to repay a loan, the lender could send it to collections, which could damage your credit.
Learn more: What Happens if You Don't Pay Back a Payday Loan?
What Do You Need for a Payday Loan?
Payday lenders have few requirements for approval. Most don't run a credit check or even confirm that you can repay the loan while covering your other bills. Here's what you'll typically need:
- A government-issued photo ID: Lenders need to verify your identity and confirm that you're at least 18 years old. A driver's license, state ID or passport usually works.
- An active bank account: You'll generally need a checking account in relatively good standing so the lender can deposit your funds and later collect payment, either by cashing a post-dated check or debiting the account electronically.
- Proof of a steady income: Lenders want to see that you have money coming in to repay the loan. A recent pay stub, bank statement or proof of benefits can serve as evidence.
- Contact information: Expect to provide a phone number, email address and home address so the lender can reach you and keep records on file.
Do Payday Lenders Check Credit?
You typically don't need to undergo a credit check when applying for a payday loan, making it appear less risky than other financing options.
Overall, though, payday loans are among the riskier financial choices you can make, especially when you're already going through financial hardship.
Do Payday Loans Affect Your Credit?
Payday loans generally don't affect your credit. There's no hard inquiry when you apply, and payday lenders usually don't report on-time payments to the credit reporting agencies. That means repaying a payday loan on time generally won't help you build credit.
However, if you can't repay a payday loan and the lender has given up trying to collect, it may sell your debt to a collection agency. Once that happens, the agency will typically report the unpaid debt to the credit bureaus, which can do significant damage to your credit scores. In other words, a payday loan can hurt your credit even if it can't help it.
How to Get a Payday Loan
To get a payday loan, you'll first need to check whether they're legal in your state. If payday lenders operate where you live, you can apply by searching for lenders that offer loans in your area.
Options may include online lenders and physical stores that might also handle check cashing, money transfers and other services.
That said, it's crucial to treat a payday loan as a true last resort. The high costs and short repayment terms can deepen the very financial hole you're trying to climb out of. Before you apply, carefully research and compare every alternative so you can avoid worsening your situation.
Alternatives to Payday Loans
One reason payday loans are so popular may be a lack of awareness about the alternatives. While you may not qualify for all of these options, it's worth researching them to keep your costs down. Here are a few to consider.
Personal Loans for Bad Credit
Some lenders specialize in working with people who have poor credit. Whether you need to cover basic expenses, handle an emergency or consolidate debt, you can often get the cash you need.
A bad-credit personal loan will charge a higher interest rate than other personal loans, but the rate will still be far lower than what you'd get with a payday loan.
Payday Alternative Loans
If you belong to a federal credit union or can join one, a payday alternative loan (PAL) may be one of the most affordable ways to cover a small emergency. These small-dollar loans are regulated by the National Credit Union Administration (NCUA), which caps their costs to help borrowers avoid a debt cycle.
There are two types available, depending on the credit union:
- PAL I: You can borrow $200 to $1,000 and repay it over one to six months. You'll need to have been a credit union member for at least a month before you apply.
- PAL II: You can borrow between $100 and $2,000 and repay it over one to 12 months. There's no waiting period, so you may be able to apply as soon as you join.
Both types cap the interest rate at 28% and limit the application fee to $20. Credit unions also can't roll a PAL over into a new loan unless the extension doesn't tack on fees or increase the amount owed. So, you avoid the compounding fees that trap many payday borrowers.
Tip: If you're considering a PAL and your credit union doesn't offer them, use NCUA's credit union locator tool and select "payday alternative loans" in the Services section of the additional search options to find one that does.
Credit Cards for Bad Credit
Most credit cards for people with bad credit require a security deposit, which won't help if you're short on cash. But some issuers offer unsecured cards with low credit requirements.
Retail credit cards, for instance, are often within reach for people with bad credit. And while they typically come with low credit limits, many can be used outside the store.
Family or Friends
Asking a loved one for financial help is never a fun conversation. But if the alternative is being driven deeper into debt, it may be worth it. Just be sure to create an official agreement and stick to it to protect your relationship.
Frequently Asked Questions
Are Payday Loans Secured or Unsecured?
Payday loans are unsecured, meaning they aren't backed by collateral like a car or home. Instead, the lender relies on access to your bank account or a post-dated check to collect payment when the loan comes due.
When Do You Have to Pay Back a Payday Loan?
A payday loan is usually due on your next payday, often two to four weeks after you borrow. The exact due date is spelled out in your loan agreement, and repayment is typically expected in a single lump sum.
What Happens if You Can't Pay Back a Payday Loan?
If you can't repay on time, fees and interest can pile up quickly. The lender may try to debit your account repeatedly, roll the balance into a new loan or eventually send the debt to collections, which can hurt your credit.
How Can I Tell if a Personal Loan Lender Is Legitimate?
If you opt for a bad-credit personal loan instead of a payday loan, you can guard against scams by verifying the lender has a physical address and is registered in your state (check with your state attorney general's office). Red flags include requests for upfront payment, high-pressure tactics, guarantees of approval, an insecure website (lacking an "s" after "http" in the URL), or phone calls or texts offering you a loan. Using a reputable personal loan platform to find a loan can also help protect you against scam artists.
Know Your Options
Payday loans can put cash in your hands fast, but their steep costs and short terms make them one of the riskiest ways to borrow. In most cases, you'll be better served by an alternative like a bad-credit personal loan, a PAL or help from someone you trust.
If you need money right now, look into other ways to get emergency cash first. And if you're worried about your credit, you can check your FICO® Score☉ Θ and Experian credit report for free to see where you stand. From there, you can take meaningful steps to improve your credit so you'll have better, more affordable borrowing options down the road.