Payday loans are short-term, high-interest loans that lenders make based on your income. The amount of the loan is generally equal to a portion of your next paycheck.
Payday loans can provide quick cash, but they charge very high interest rates and are often cited as a form of predatory lending. Even if you have bad credit, it’s important to check out your other options, such as a personal loan or an emergency loan, before considering a payday loan. Here is what you need to know.
Key Takeaways
- Payday loans are short-term, very-high-interest loans for individuals.
- Payday loans are typically based on how much you earn, and you usually have to provide a pay stub when applying for one.
- Payday loans are not available in all states, with some states outlawing them altogether.
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Investopedia / Michela Buttignol
How Payday Loans Work
Payday loans go by a number of names in different places around the country, and there is no universally accepted definition for them. But they are typically short-term loans for amounts of $500 or less. In general they must be repaid in full on the borrower’s next payday, or when the borrower receives other income they have coming due, such as a Social Security payment. As such, they typically have terms of two to four weeks.
Payday loans are characterized by their high interest rates. According to the Consumer Financial Protection Bureau (CFPB), “A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent.”
At the time of the loan, the borrower will usually authorize the lender to automatically deduct the funds from their bank account on the due date if they haven’t already made their payment or else write a post-dated check to cover the balance plus interest and fees. In some states, borrowers who are unable to repay the loan at that point can roll it over into a new loan, digging themselves further into debt.
Allowing payday lenders access to borrowers’ bank accounts has created problems in its own right. According to the CFPB, some lenders have made repeated attempts to withdraw money from borrower accounts, even after it’s clear the money isn’t there. (In once instance, the CFPB said, a lender made 11 attempts in a single day.) As a result, borrowers can be subject to multiple overdraft or nonsufficient funds fees from their banks. A new CFPB rule limiting lenders to two such attempts is scheduled to go into effect in March 2025, after surviving a challenge from the payday lending industry that went all the way to the U.S. Supreme Court.
How to Get a Payday Loan
If you wish to, you can apply for payday loans at various online providers or local storefront lenders.
For a payday loan application, you will need a bank or similar account and a government ID. You will also need to provide proof of income, which can be done through your recent work pay stubs.
Payday lenders will not normally run a credit check on you. Their loans are also unsecured, meaning that you don’t have to put up any collateral as you would, for example, with a car loan. However, as mentioned earlier, you will have to give the lender authorized access to your bank account or write a post-dated check for the full amount you’ll owe.
Some federal credit unions offer what they call payday alternative loans (PALs). These lower-rate loans can range from $200 to $1,000, with terms of one to six months.
Payday Loan Interest Rates
While most states have usury laws that limit interest charges to anywhere between 5% and 30%, payday lenders fall under exemptions that allow them to charge many times that in certain states.
Currently 37 states have laws that permit payday loans, although many put some restrictions on them and some prohibit them altogether.
In California, for example, a payday lender can only lend up to $300 at a time. It can also charge a fee of up to 15% of the loan amount, with a maximum fee total of $45. Although 15% doesn’t seem exceptionally high, on a 14-day loan, it becomes the equivalent of an APR of 460% for a $300 loan.
While the federal Truth in Lending Act requires payday lenders to disclose their finance charges, many people apparently overlook the costs in their hurry to get the cash.
Are Payday Loans Fixed or Variable?
Payday loans are usually meant to be paid off in one lump-sum payment when you get your paycheck. Because of this, the interest rate on these loans is fixed. In fact, many payday lenders don’t even express their charges as an interest rate, but they instead charge a fixed flat fee that can be anywhere from $10 to $30 per $100 borrowed.8
Is a Payday Loan Secured or Unsecured?
Most payday loans are unsecured. This means that you do not have to give the lender any collateral or hand over a valuable item as would to get a pawn shop loan.
Can You Get a Payday Loan Without a Bank Account?
If you don’t have a regular bank account, some payday lenders will accept a credit union account or prepaid card account instead.9
How Long Do Payday Loans Stay on Your Credit Record?
Payday lenders do not normally report to the credit bureaus, so the loan is unlikely to appear in your credit reports or affect your credit score, as long as you pay it off in time. If you default on the loan, however, and it’s turned over to collection agency, that could show up on your credit reports and damage your credit score.10
Can Payday Loan Debt Be Discharged in Bankruptcy?
Yes, a payday loan, like many other types of debts, can be discharged in bankruptcy. However, you could face legal problems if you took out the loan shortly before filing for bankruptcy and the lender accuses you of fraud.11
The Bottom Line
Payday loans are designed to cover short-term expenses, and they can be taken out without a credit check or providing any collateral. The catch is that these loans charge very high fees and interest rates. If you’re considering a payday loan, then you may want to first take a look at alternative emergency loans for bad credit.
FAQ’s
What is a payday loan? A payday loan is a short-term, high-interest loan typically designed to be repaid on the borrower’s next payday. These loans are generally for small amounts, usually under $500, and target borrowers who need quick cash.
How does a payday loan work? Payday loans provide fast cash based on a borrower’s income. To get one, borrowers provide a pay stub, and the lender usually requires authorization to access their bank account to deduct the repayment on the due date.
What is the average interest rate on a payday loan? Payday loan interest rates can be extremely high, with an average annual percentage rate (APR) of around 400%. Some payday loans can even have APRs as high as 700% or more.
Are payday loans legal everywhere? No, payday loans are not legal in all states. Some states have restrictions or completely outlaw payday loans due to their high-interest rates and potential for creating a debt trap.
Can I get a payday loan with bad credit? Yes, payday lenders typically do not perform credit checks, so borrowers with poor or no credit history may still qualify.
What is a payday loan alternative? Alternatives to payday loans include personal loans, payday alternative loans (PALs) from credit unions, and credit card cash advances. These options often have lower interest rates.
How quickly can I get a payday loan? Many payday loans are available almost immediately, with funds deposited into your account within one business day, making them a convenient option for urgent needs.
What are the risks of payday loans? Risks include high fees, interest rates, and the potential to enter a cycle of debt if borrowers repeatedly roll over their loans and incur additional fees.
What happens if I can’t repay my payday loan on time? If you can’t repay, some lenders may allow you to roll over the loan, which comes with additional fees. However, rolling over can lead to increased debt. Failing to repay may also lead to collection actions and overdraft fees.
Are payday loans secured or unsecured? Payday loans are typically unsecured, meaning no collateral is required. However, borrowers usually give lenders access to their bank accounts as a condition.
Can I get a payday loan without a bank account? Some lenders allow payday loans with alternative accounts, like a credit union or prepaid card account, but requirements vary by lender.
Will a payday loan affect my credit score? Payday loans generally do not affect your credit score since most lenders don’t report to credit bureaus. However, if you default and the debt goes to collections, it may impact your score.
How much can I borrow with a payday loan? Payday loans are usually for small amounts, ranging from $100 to $500. State regulations often cap the maximum loan amount.
Can payday loan debt be discharged in bankruptcy? Yes, payday loan debt can be discharged in bankruptcy. However, taking out a payday loan just before filing for bankruptcy could raise fraud concerns.
What is a payday alternative loan (PAL)? PALs are small, low-interest loans offered by some federal credit unions as an alternative to payday loans, with terms from 1 to 6 months and a maximum APR of 28%.
Do payday loans have fixed or variable interest rates? Payday loans usually have fixed rates, often structured as a flat fee per $100 borrowed, rather than a traditional interest rate.
What documents are needed for a payday loan? Typically, you’ll need government-issued ID, a pay stub or proof of income, and a bank account to qualify for a payday loan.
Why are payday loans considered predatory? Payday loans are often labeled as predatory due to high interest rates, short repayment periods, and fees that can trap borrowers in a cycle of debt.
What fees are involved with payday loans? Fees include a flat fee per $100 borrowed, typically around $10 to $30. Some states also have limits on these fees to protect borrowers.
Can I apply for a payday loan online? Yes, many payday lenders operate online, allowing borrowers to apply and receive funds without visiting a storefront.
How do payday lenders collect repayment? Borrowers usually give payday lenders access to their bank accounts for automatic withdrawals on the due date or provide a post-dated check for the loan and fees.
Do payday loans roll over? Some states allow payday loans to roll over, meaning borrowers can extend the loan term but with additional fees, which can increase debt levels.
What is the Consumer Financial Protection Bureau’s (CFPB) rule on payday loans? The CFPB’s rule, taking effect in 2025, restricts payday lenders to two withdrawal attempts from borrowers’ accounts to prevent excessive overdraft fees.
What are common alternatives to payday loans if I need fast cash? Alternatives include borrowing from friends or family, a credit union payday alternative loan, or checking for employer-provided paycheck advances.
How can I pay off a payday loan faster? Paying extra or refinancing with a lower-interest loan, like a personal loan, can help pay off payday loans faster and avoid high interest.
Are payday loans available for Social Security recipients? Yes, some payday lenders offer loans based on Social Security income, though these loans still carry high interest rates.
Do payday loans have a cooling-off period? Some states require a “cooling-off” period between payday loans to prevent borrowers from taking on too much debt too quickly.
How does a payday loan differ from a personal loan? Payday loans have much shorter terms, higher interest rates, and typically don’t require a credit check, unlike personal loans, which are usually more affordable and longer-term.
Are payday loans tax-deductible? No, payday loans are not tax-deductible. They are considered personal expenses.
What should I consider before taking out a payday loan? Before considering a payday loan, evaluate other loan options, assess the total costs, and consider your ability to repay it without impacting your financial stability.