What are payday loans?

Household debt has risen by $184 billion since the start of 2024 and delinquency rates have increased across all debt types, according to the Federal Reserve. If you're struggling with debt, having a quick fix to bridge the gap between paychecks may seem like a reasonable option. But with one in five borrowers defaulting on payday loans, you may be better off with an alternative like a personal loan.

Most payday loans have ultra-high annual percentage rates (APRs) that can make them hard to repay and lead to a rapidly growing loan balance. We'll take a closer look at how payday loans work, what you need to look out for, and alternatives.

What is a payday loan?

Payday loans are short-term, high cost loans for small amounts - generally $500 or less - that are due on your next payday. They're known as "payday" loans because they are usually repaid in a single payment on your next paycheck, or within 10 to 14 days of borrowing. Payday loans are a type of loan that doesn't require a credit check and you generally only need to provide proof of income for approval, making them a popular option if you have poor credit (a FICO score below 580).

How do payday loans work?

After applying for a payday loan, funds may be deposited into the same bank account where you receive your paycheck, received as a check, loaded on a debit card, or picked up as cash. Funding is typically instant or same-day.

Payday lenders don't charge a traditional interest rate, and there are no monthly payments. Instead, you provide the lender a postdated check or other access to your checking account. When the loan is due - typically by your next payday - the lender will deduct it from your account. This can be surprising if you are accustomed to making minimum payments on credit cards or spreading payments over several years, like with auto or personal loans.

But in some states, it is legal for lenders to "renew" or "roll over" a loan if you can't afford to make the full payment. However, this can come with very high fees that can lead to a cycle of hard-to-escape debt.

How much do payday loans cost?

Payday loans are regulated at both federal and state levels. However, many states have laws that limit the fees or interest rates payday lenders can charge, and some states have banned payday loans altogether.

Fees typically range from $10 to $30 for every $100 borrowed, according to the Consumer Financial Protection Bureau (CFPB). But it's helpful to convert fees into an APR in order to see how they compare to more traditional forms of lending - you can do this with a payday loan calculator.

For example, if you obtain a two-week payday loan with a $15 per $100 fee, your total debt owed would be $115 with an APR of 391.07%. This is much higher than even the highest APRs on traditional personal loans (around 36%) and credit cards (under 40%).

Compared to payday loans that reach three-digit APRs, a credit card or personal loan for bad credit may be a better alternative for your needs.

Payday loan rates by state

Payday Loan Cost by State

Pros and cons of payday loans

Pros

1. Quick access to cash: Payday loans generally have fast approval and funding, often within the same day.
2. Minimal eligibility requirements: You usually only need proof of income, a bank account, and identification, making these loans more accessible if you have poor or no credit.
3. No credit check: Payday lenders may not conduct credit checks, so your credit score won't be impacted (or considered) in the application process.

Cons

1. High APRs: The APR on payday loans is extremely high, often equating to at least 100% or much more, making them a very expensive form of credit.
2. Short repayment period: You are usually required to repay the loan in full by your next payday, typically within two weeks, which can be difficult to manage.
3. Risk of debt cycle: Due to the high costs and short repayment period, you may end up taking out new loans to repay old ones, leading to a cycle of debt.
4. Limited loan amounts: Payday loans are usually for small amounts, around $500 or less, which may not be sufficient to cover larger financial needs.

Payday loan alternatives

If possible, don't get a payday loan. Get something else. In many cases, you may be able to find more affordable forms of borrowing to turn to in a pinch.

1. Personal loans: You can use a personal loan to cover virtually any expense, and they come with much lower interest rates (up to 36%) and longer repayment terms (around 2-7 years) that can result in smaller, more manageable monthly payments, even if you have bad credit.
2. Credit cards: The average interest rate for a credit card is 21.59%, according to the Federal Reserve, which is significantly lower than a three-digit APR for payday loans.
3. Payday alternative loan (PAL): A PAL is a type of loan offered by certain federal credit unions. They are available up to $2,000 with repayment terms to 12 months. Interest rates are capped at 28%, making PALs a much more affordable option compared to traditional payday loans. Some types of PALs are immediately available after joining a credit union.
4. Family or friends: If you can borrow money from a friend or family member, this can be a free or low-cost way to avoid a payday loan. Just be careful whenever borrowing money from friends or family. Set clear repayment terms, in writing, to avoid causing tension or resentment in the relationship.
5. Credit counseling: If your income isn't enough to pay your expenses, look for a nonprofit credit counseling organization to better understand your options. For example, a credit counselor may suggest a debt management program to help you manage other existing debts or negotiate lower rates. You can reach out to 211.org for more information.
6. Government assistance: If you're struggling to make ends meet, you may qualify for assistance paying for food, utilities, housing, and more. Visit USA.gov's benefits portal to see what you qualify for.

How to get a payday loan

Important: Know what you're getting into by looking at payday loan statistics in your state. Certain states, like Colorado and Ohio, have enacted consumer protections that limit average APRs to the low 100% range.

1. Compare all alternatives: Because payday loan costs can be steep, it's important to consider all other options before committing to one. You might ask your landlord for an extension, set up a payment plan for utility bills, or contact creditors to request a payment deferral. In some cases, taking a potential hit to your credit or paying a late fee may be worth avoiding potentially predatory loans.
2. Check lender reviews: Before taking out a payday loan, research what others have said about the lender. If you're considering an online payday lender, look up the lender on the CFPB complaint database or the Better Business Bureau (BBB). For local lenders, Google reviews can also potentially offer valuable insights.
3. Have the necessary documents: To qualify for a payday loan, you typically must be 18 years or older and have an active bank account, government-issued ID, and proof of income, such as a pay stub. Some lenders may also require your Social Security number.
4. Look for disclosures: To avoid potential scams, check the lender's license to operate in your state, the total amount you're expected to repay and the due date, and any fees along with the APR. If a lender isn't transparent with this information, consider it a red flag.
5. Have a plan to repay the loan: To avoid falling into a payday loan debt trap, plan how you will repay the loan in full by the due date while covering your other regular expenses. Having a repayment plan in place can help you avoid additional fees and the need to borrow again.

Are payday loans legal?

While payday loans are a legal form of lending in many states, they come with a lot of risks and criticisms because of their high fees, and are best to avoid when possible. Because of the short repayment term, payday loans can also be difficult to repay on time. As a result, you may need another high-interest loan to repay the original payday loan. This cycle of debt can continue, while fees and successive loan amounts accumulate, making paying the debt harder and harder.

If you need to take out a payday loan in an emergency, it's best to be aggressive about paying it back on time so you can avoid falling into a cycle of high-interest debt.

FAQ

How much can you get from a payday loan?

The amount you can borrow from a payday loan varies depending on the lender's policies, your income, and the laws and regulations in your jurisdiction. Generally, payday loans are designed to be small, short-term loans. Many states cap payday loan amounts at $500.

What happens if you can't repay a payday loan?

If you are unable to repay a payday loan on time, it can lead to expensive consequences, such as additional fees, calls from collections agencies, and a hit to your credit score. Some lenders let you roll over an unpaid payday loan or extend it, which can result in additional fees and make the loan harder to repay. For this reason, consider payday loan alternatives or only take out the bare minimum loan amount you need.

Why are payday loans so expensive?

Payday loans are expensive because of the steep fees associated with them. For example, payday loan lenders may charge up to $30 per $100 borrowed, depending on the lender and state. In addition to high fees, their short repayment terms can make them difficult to repay on time, which ends up costing more money.

Can I get a payday loan with bad credit?

Yes, you can often get a payday loan even with bad credit. Payday lenders typically don't perform a credit check, but instead consider your ability to repay the loan based on your paycheck. And since you may be required to secure the loan with a postdated check, the money could be withdrawn from your account when it's due.