What is a payday loan?
These quick cash advances are convenient but carry risk
If you need money fast or have poor credit, you might be tempted to use a payday loan. Not only are these loans easy to get because there usually aren’t any credit requirements, but same-day funding is often available.
Even though these loans may seem convenient, they’re risky and best avoided. Because they’re so easy to get, the fees are often extremely high. Plus, you’ll usually need to repay the loan in full in no more than two to four weeks, which can be hard if you’re already strapped for cash.
Payday lending is illegal in some states. Payday loans typically have very high interest rates and carry risk. Ensure you have a clear understanding of the fees, terms and conditions of any payday loan before borrowing.
- Payday loans can provide same-day funding of up to $1,000.
- These loans are usually repaid in one lump sum in no more than two to four weeks.
- There are usually little to no qualifications other than having a steady source of income.
- The costs of payday loans can be extremely high, with annual percentage rates (APRs) of close to 400% or more.
Understanding payday loans
Payday loans advance borrowers a small amount of cash, typically between $50 and $1,000, with the agreement that the loan will be paid back in full when the borrower receives their next paycheck. You may also find these loans going by other names like short-term loans, payday advances, salary loans, payroll loans, small-dollar loans and cash advance loans.
The purpose of payday loans is to provide quick financial relief for those in need of cash. However, since these loans are intended to be quickly repaid, there are harsh penalties if they're not repaid on time. Plus, though you may be able to get funding instantly or in a few hours, the costs are often extremely high, with fees equating to APRs of nearly 400% or more.
To the greatest extent possible, it’s best to avoid payday loans. Many who use payday loans find themselves in a cycle of borrowing that’s difficult to escape because the fees are so high. If you decide to get a payday loan, make sure to use a reputable lender with reasonable rates and terms. You can also check our payday loan list for customer reviews.
» MORE: Payday loans vs. personal loans
The cost of payday loans
Payday loans commonly carry fees ranging from 10% to 30% of the loan amount, though these fees vary by state. For instance, let’s say you get a payday loan of $300 with a fee of 15%, or $45. If you repay the loan when you get your next paycheck in two weeks, the fee is equivalent to an APR of almost 400%.
If you don’t repay the loan when it comes due in two weeks, some states might allow you to roll it into a new loan. Assuming you’re charged another 15% fee to do this, your APR is unchanged at nearly 400%, but you’d owe your lender another $45 to extend the term by two weeks.
Many lenders require you to give them a postdated check for the amount you borrowed when you get the payday loan. If you don’t have sufficient funds to cover the postdated check when your lender deposits it when the loan comes due, you might owe your bank and payday lender nonsufficient funds (NSF) fees.
On average, banks charge $34 for NSF fees, according to the Consumer Financial Protection Bureau (CFPB).
Payday loans pros and cons
People may consider getting a payday loan because it’s easy to apply, you can get cash as soon as the day you apply, even people with bad credit can get funding and the approval rate is high.
Although these seem like advantages, payday loans should generally be avoided. The APRs are often extremely high, the funds must be repaid in days or weeks and penalties for not repaying it on time can be steep. Additionally, although payday loans are not reported to credit bureaus, your credit could be negatively affected if you don’t pay your loan as agreed, it’s turned over to collections or you’re sued for the balance.
- Quick cash
- Easy application process
- High approval rate
- Available for people with bad credit
- High APR rates
- Severe penalty fees
- Must complete payback in a short period
- Debt from nonpayment impacts credits
» MORE: Best bad credit loans
Payday loans and the law
Many states have legal statutes specifically allowing payday lending. However, there are at least 21 states where traditional payday lending is expressly prohibited or effectively disallowed due to payday lending statutes expiring or being repealed, due to annual percentage rate (APR) caps on consumer loans or because there aren’t any licensed payday lenders in the state.
Payday loans are prohibited, heavily restricted or there aren’t any licensed lenders in Washington, D.C., and these 21 states:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- South Dakota
- West Virginia
A key goal of APR caps and other payday lending laws is to protect consumers from usurious rates and other predatory lending practices. For example, APRs can’t exceed 33% in Maryland and 36% in Colorado. These rates are much lower than the APRs of nearly 400% or more that you might be charged for small payday loans in some other states, such as California.
If you believe you’ve been a victim of predatory lending practices, you can file a complaint with the CFPB. As a consumer, you can file reports of fraud or other illegal activity with your state's Federal Trade Commission (FTC) or attorney general’s office.
Alternatives to payday loans
If you find yourself in need of quick funding, there are many alternatives you should consider before turning to a payday loan. Many of these options, such as personal loans, payday alternative loans and paycheck advances can also get you quick funding. Plus, there are even options available for people with poor credit or no credit history, and these rates are typically much lower than what you’ll pay for a payday loan.
As you’re considering your funding options, Gates Little, president of The Southern Bank Company, noted that “even using a high-interest credit card will cost you less interest than a payday loan.” While it’s best to keep your credit utilization ratio to 30% or less, even credit card availability of as little as $500 to $1,000 can help you avoid payday loans.
Building an emergency fund can also be a way to help you avoid payday loans, even if you’re only able to initially save $1,000 or less. Little explained that having an emergency fund “you replenish over time instead of using high-interest loans or credit cards can help you when you need immediate access to cash.”
Additionally, if your funding need is related to a cash flow problem, Little suggests reaching out to your lender or service provider. “Explain the situation and ask to defer your payment,” said Little. Not only might this help you avoid having your services cut off, Little explained, but you may also avoid having non-payments negatively reflected on your credit reports.
Furthermore, “Calling your creditors can open up options like a payment plan or even debt reduction,” Little said. “So it is worthwhile to be proactive and in communication with your creditors.”
» MORE: How to handle bill collectors
Are payday loans secured or unsecured?
Payday loans are unsecured, meaning you aren’t required to provide the lender with assets it can use as collateral to get the loan. Since the loan is unsecured, you aren’t at risk of losing any specific assets (like your car) if you don’t repay the loan as agreed. Even so, your lender may charge steep fees, turn you over to collections or sue you if you don't repay the loan on time.
How much can you get from a payday loan?
The amount of money you can borrow using a payday loan largely depends on the laws in your state. Even so, payday loans commonly average $500, though you may be able to get loans of more or less than this amount. For example, you might get payday loans of $50 to $1,000.
Can you get a payday loan without a job?
Yes, you can get a payday loan without a job, but you need to have a steady source of income. The purpose of payday loans is to provide short-term funding while you wait for the money you expect to receive quickly, such as a paycheck.
You’ll usually need to give your lender a postdated check to cash on your next payday, so it’s necessary to have deposited enough funds in your bank account to cover the loan before the check is cashed (from a paycheck, side hustle, pension distribution, and so on).
Do payday loans hurt your credit?
In most cases, payday loans aren’t reported to the credit bureaus, which usually won’t affect your credit. However, if you don’t repay the loan as agreed and it’s sold to a debt collector, it could hurt your credit, as collections are often reported to major credit reporting agencies.
- Arizona Attorney General Kris Mayes, “ Consumer Alert: Payday Loans and Collection Calls .” Accessed May 17, 2023.
- Arizona Department of Insurance and Financial Institutions, " What Happened to the Payday Lender that DIFI Used to License? " Accessed May 17, 2023.
- Arkansas Attorney General, " Consumer Protection - Payday Lending/Check Cashing ." Accessed May 17, 2023.
- Brookings Institute, " Study Finds Strong Continuing Support for South Dakota's Capping Consumer Loan Rates at 36% Interest ." Accessed May 17, 2023.
- Consumer Financial Protection Bureau, " 12 CFR Part 1041, RIN 3170-AA80 - Payday, Vehicle Title, and Certain High-Cost Installment Loans ." Accessed May 17, 2023.
- Center for Responsible Lending, “ The Sky Doesn’t Fall: Life After Payday Lending in South Dakota .” Accessed May 17, 2023.
- Colorado Legal Resources Provided by LexisNexis, Official Publisher of the Colorado Revised Statutes, " C.R.S. 5-3.1-105 ." Accessed May 15, 2023.
- Consumer Financial Protection Bureau, " Consumers on Course to Save $1 Billion in NSF Fees Annually, but Some Banks Continue to Charge These Fees ." Accessed May 17, 2023.
- Consumer Financial Protection Bureau, " Fraud and Scams ." Accessed May 17, 2023.
- Consumer Financial Protection Bureau, " I Heard That Taking Out a Payday Loan Can Help Rebuild My Credit or Improve My Credit Score. Is This True? " Accessed May 18, 2023.
- Consumer Financial Protection Bureau, “ Submit a complaint about a financial product or service .” Accessed May 17, 2023.
- Consumer Financial Protection Bureau (CFPB), " What Is a Payday Loan? " Accessed May 15, 2023.
- Council of the District of Columbia, " D.C. Law 17-42. Payday Loan Consumer Protection Amendment Act of 2007 ." Accessed May 17, 2023.
- CT.gov - Smart Consumer, " Pay Day Loans ." Accessed May 17, 2023.
- CT.gov - State of Connecticut Department of Banking, " File a Payday Loans - Title Loan Complaint ." Accessed May 17, 2023.
- Hawaii Department of Commerce and Consumer Affairs - Financial Institutions, " 2022 Licenses for Small Dollar Loans / Installment loans Rev 12.29.21 ." Accessed May 15, 2023.
- Illinois Department of Financial and Professional Regulation, " Illinois Trends Report - Select Consumer Loan Products Through December 2021 " Accessed May 17, 2023.
- Illinois General Assembly, " Illinois Compiled Statutes .” Accessed May 15, 2023.
- Maryland Department of Labor, " 'Payday' Loans ." Accessed May 15, 2023.
- Mass.gov, " Payday Loans ." Accessed May 15, 2023.
- Montana Department of Administration - Banking & Financial Institutions, " Montana Deferred Deposit Loan Licensing ." Accessed May 15, 2023.
- MyCreditUnion.gov, “ Payday Loan Alternatives .” Accessed May 18, 2023.
- National Conference of State Legislatures, " Payday Lending State Statutes ." Accessed May 15, 2023.
- National Credit Union Administration (NCUA), " Board Extends Loan Interest Rate Ceiling; Approves Annual Performance Plan ." Accessed May 18, 2023.
- National Credit Union Administration (NCUA), “ Payday Alternative Loan Rule Will Create More Alternatives for Borrowers .” Accessed May 18, 2023.
- Nebraska Department of Banking and Finance, " Delayed Deposit Services (Payday Lenders) ." Accessed May 15, 2023.
- New Hampshire Banking Department, " Small Loan, Payday Loan, Title Loan Lenders ." Accessed May 17, 2023.
- New Hampshire Statutes, “ 399-A: Regulation of Small Loans, Title Loans, and Payday Loans .” Accessed May 17, 2023.
- New Mexico Legislature, " 2022 Regular Session - HB 132 - Interest Rates for Certain Loans ." Accessed May 17, 2023.
- New York State Department of Financial Services, “ Avoiding Predatory Loans and Loan Scams. ” Accessed May 17, 2023.
- North Carolina Department of Justice - Attorney General Josh Stein, " Payday Loans ." Accessed May 17, 2023.
- Office of the Attorney General - State of Arizona, " June 9, 2010 ." Accessed May 17, 2023.
- Office of the New York State Attorney General, " Payday Loans - Avoid the Debt Spiral ." Accessed May 17, 2023.
- Office of the Vermont Attorney General - Charity R. Clark, " Personal Loans ." Accessed May 17, 2023.
- Ohio Legislative Service Commission (LSC) Staff - Members Brief, " Payday Lending in Ohio ." Accessed May 17, 2023.
- Omaha World-Herald, " Payday Lenders Disappeared from Nebraska After Interest Rate Capped at 36% ." Accessed May 15, 2023.
- Pennsylvania Attorney General Michelle A. Henry, " AG Shapiro Announces Relief for 80,000 Pennsylvanians Targeted by Online Payday Loan Scheme ." Accessed May 17, 2023.
- State of California Department of Financial Protection & Innovation (DFPI), " New Requirements for Licensees Making Consumer Loans of $2,500 to $10,000 California Financing Law ." Accessed May 17, 2023.
- State of California Department of Financial Protection & Innovation, " Payday Lenders - Publications and Reports ." Accessed May 17, 2023.
- State of California Department of Financial Protection & Innovation, " What You Need to Know About Payday Loans ." Accessed May 17, 2023.
- State of California Department of Justice - Rob Bonta - Attorney General, “ Payday Loans .” Accessed May 17, 2023.
- State of Georgia - Department of Banking and Finance, " Payday Lending ." Accessed May 17, 2023.
- State of New Jersey Department of Banking & Insurance, “ Personal Finance - Frequently Asked Questions .” Accessed May 17, 2023.
- The Denver Post, " After Colorado Voters Cracked Down on Payday Loans, Lenders Found Loopholes. A New Bill Would Try to Close Them ." Accessed May 15, 2023.
- The State of New Jersey Department of Law & Public Safety, " AG Grewal Leads Coalition of 25 AGs Opposing Repeal of Federal Rules Protecting Consumers from Risky Payday Loans and Other High-Risk Laws ." Accessed May 17, 2023.
- Department of Justice, " Report Fraud ." Accessed May 17, 2023.
- West Virginia Division of Financial Institutions, " Consumers ." Accessed May 17, 2023.
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