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How do payday loans work?

Payday loans allow you to borrow a small amount against your next paycheck

by Jessica Render ConsumerAffairs Research Team
lender holding cash

Payday loans are short-term, high-interest cash loans. To obtain one, the borrower writes a personal check to a lending company for the principal amount plus fees and takes home the cash for the principal amount. Typically, repayment is due two weeks after the loan is given, or on the customer’s next payday.

Payday loan requirements

Requirements may vary between lenders, but you will need to meet the following criteria to obtain a payday loan:

  • A valid Social Security number
  • A steady and documented source of income
  • A bank account in good standing
  • A personal check
  • A Government-issued photo ID

How to apply for a payday loan

Once you have all of the required items for a payday loan, follow these steps:

  1. Visit a payday loan company in person, give them a call or log on to their website.
  2. Provide personal information and proof of employment.
  3. Write a personal check for the loan amount and fees, or provide digital account authorization.
  4. Take home cash or wait for a direct deposit.
  5. Repay loan or apply for loan rollover.

Common payday loan questions

How much can you borrow with a payday loan?
Most payday loans are between $100 and $1,000. Many states have caps on the amount a payday lender can offer a customer. Payday loans are illegal in some states. Find out ahead of time how much your state allows you to borrow from a payday lender.

How much is a payday loan?
Payday loans typically come with a fee of $10–$30 per $100 borrowed.

What is the average interest rate on a payday loan?
It's common for a payday loan to have an interest of 400 percent annually (APR). However, rates of 780 percent or higher have been reported in states without regulations. Rates differ based on the length of the repayment period, with shorter-term loans having the highest rates.

Are payday loans legal?
Payday loans are prohibited in the states of Arkansas, Arizona, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, North Carolina, Vermont and West Virginia.

Many other states have passed “usury laws” to protect consumers from extremely high or predatory interest rates. These laws put a cap on the percentage a lender can charge. However, the laws only apply to banks or loan companies whose corporate headquarters is located within that state. If a company has branches located in a state with usury laws but is headquartered in a state without the laws, the company can still charge high rates.

Can military members get a payday loan?
Active members of the military cannot get a payday loan. Special laws have been put in place to protect service men and women from the predatory nature payday loans have become known for.

Can you have multiple payday loans?
No, most payday lenders will not do this. Payday loans are intended to be small cash loans to provide a short-term solution to someone in need. Taking out more than one payday loan would increase the likelihood of defaulting on the loan.

Do payday loans check your credit?
Most payday loan companies will run a soft credit check on a customer before approving a loan. These checks include looking at the customer’s financial history and credit score, but not conducting a traditional credit inquiry with the three major reporting bureaus.

Do payday loans show on a credit report?
Payday loans do not show up on credit reports by the three major reporting agencies, Equifax, Experian and TransUnion.

How do payday loans affect your credit?
While taking out a payday loan should not affect your credit score, if you do not repay your payday loan and it goes to collections, that report will likely show up on your credit report and negatively affect your credit score for up to seven years.

Can you get a payday loan on social security?
Yes. Some payday loan companies will accept a Social Security check as employment.

What happens if you can’t repay a payday loan?
If a customer cannot and does not repay a payday loan and applicable fees, the lender will begin by depositing the original check or working out a rollover plan with the customer. However, if the customer eventually cannot pay or rollover the loan, the amount may be turned over to a collection agency. Collection agencies may ultimately file a lawsuit in the attempt to collect the payment.

Can they garnish your wages for a payday loan?
Yes. If a customer defaults on a loan and is sued, a payday lender or collection agency can get a court order for the amount owed in the form of wage garnishment. However, the company must have filed suit and have the court order before sending the garnishment order to the employer.

Can you go to jail for not paying back a payday loan?
No. There are reports of companies threatening customers who do not repay a payday loan with jail time, which is illegal. The Consumer Financial Protection Bureau advises borrowers who have been threatened by a company with jail time to file a complaint.

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by Jessica Render ConsumerAffairs Research Team

As a member of the ConsumerAffairs research team, Jessica Render is dedicated to providing well-researched, valuable content designed to help consumers make informed purchase decisions they can feel confident making. She holds a degree in journalism from Oral Roberts University.