- Payday loans: 4 things you need to know
- What is a payday loan?
- How does a payday loan work?
- What are the risks?
- What are the alternatives?
- Complete Guide: Payday Loans 101
- What are payday loans?
- How they work
- Why someone would get a payday loan
- How to repay a payday loan
- Risks of payday loans
- How payday loans affect your credit
- Alternatives to payday loans
- 1. Use a credit card
- 2. Get an installment loan
- 3. Apply for a personal loan online
- 4. Consider a credit union if you have time
- 5. Turn to family and friends
- 6. Generate income quickly
- 7. Ask your employer for an advance
- 8. Seek leniency to reduce or delay payments
- 9. Use emergency relief services to reduce your expenses
- 10. Consider pawn loans
- How to choose the best option for you
- Final considerations
- Learn more:
- What Is A Payday Loan And Why Is It A REALLY Bad Idea To Get One?
- What is a payday loan?
- How do payday loans work?
- The reasons people take payday loans
- The bad part about payday loans
- The REALLY bad part about payday loans
- How to avoid needing a payday loan in the first place
- Overcome bad credit
- Overcome a lack of savings
- What Is A Payday Loan?
- How a Payday Loan Works
- Payday Loan Dangers
- Who a Payday Loan Is Right For
- Payday Loan Costs
- Payday Loan Borrowing Limits
- Repaying a Payday Loan
- How Payday Loans Can Affect Your Credit
- Payday Loan Alternatives
- What Is a Payday Loan?
- What is a direct payday loan?
- How much does a payday loan cost?
- How much can I borrow with a payday loan?
- Does paying back payday loans build credit?
- What do I need to get a payday loan?
- What happens if I can't repay a payday loan?
- Payday loan alternatives to consider
- Payday loan alternatives to avoid
Payday loans: 4 things you need to know
For millions of Americans living paycheck-to-paycheck, an unexpected expense can be difficult to cope with.
Payday loans — small short-term loans designed to assist until your next paycheck arrives — may seem the solution. These loans don't typically require a credit check and provide fast access to cash. But the convenience can come at a very steep price.
What is a payday loan?
A payday loan is a short-term loan you're expected to repay within a few weeks of borrowing. Loans may be available from online lenders, through payday loan apps, or from local lenders — although some states prohibit these types. The amount you can borrow is also usually limited by state law, with many states setting a $500 cap.
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Payday loans seem attractive because they often provide same-day funding regardless of your credit score. As long as you can meet some minimal requirements, such as showing proof of income and an active bank account, you can get a payday loan.
How does a payday loan work?
Un many loans, you don't make payments over time with a payday loan. Instead, the entire borrowed amount — plus fees — must be repaid in a lump sum payment. Often, you're required to write a post-dated check for the amount due or provide authorization to withdraw the money directly from your bank account.
Fees are often very high, even though many states limit costs. Fees are often capped between $10 to $30 per $100 borrowed. This is significantly higher than the average credit card APR of 15.10 percent reported by the Federal Reserve in 2019.
What are the risks?
Because fees are so high and repayment times so short, many borrowers can't repay payday loans when they come due and must take out a second loan, incurring additional fees.
The Consumer Financial Protection Bureau (CP) found that more than four of every five payday loans were renewed within the same month.
And regulations aimed at preventing this type of re-borrowing are currently being rolled back.
Banking relationships are affected when borrowers can't repay loans, as lenders cash post-dated checks or withdraw funds from bank accounts with insufficient funds.
Half of all payday loan borrowers ended up owing bank fees for overdrafts or returned checks within 18 months, incurring an average of $185 in costs. More than a third actually had their accounts closed, according to the CFPB.
This makes future financial transactions, such as paying bills or cashing a paycheck, much more difficult and expensive.
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High payday loan costs also increase the chances of default, which means borrowers simply don't repay their loans. One in five borrowers who have taken out repeated payday loans end up defaulting and are often subject to aggressive collection efforts.
What are the alternatives?
Some payday loan alternatives, such as auto title loans, can be even more damaging than payday loans. These require borrowers to use their vehicle as collateral to guarantee a short-term loan similar to a payday loan. The lender can take the car if the borrower can't repay what they owe.
But there are also other, more affordable options that may be available depending on your situation.
If you've been a member of a credit union for at least a month, you may qualify for a payday alternative loan. These offer timely approval, are easy to qualify for, and allow you to borrow between $200 and $1,000 that you can repay over one to six months. Credit unions can charge only the cost of loan processing, with a maximum fee of $20.
Or, if you borrow from friends, family, or your employer, you may be able to avoid loan costs altogether — although company policy and state laws vary regarding the availability and costs of paycheck advances.
And if you have access to a credit card, making a purchase or taking out a cash advance to access funds could be cheaper than a payday loan even though interest charges can still be high, especially for cash advances.
Ultimately, the best option to avoid a payday loan is to save up an emergency fund with several months of living expenses so you can cover unexpected costs without borrowing. While this will take time, it ensures high fees and interest charges don't add to your financial woes when surprise expenses inevitably occur.
Complete Guide: Payday Loans 101
Payday loans are unsecured personal loans that are typically repaid on your next payday. They can be a tempting option to quickly get the cash you need, but more often than not, hidden fees and high rates can leave you trapped in debt.
Here’s what you need to know about payday loans and how they can impact your financial health.
What are payday loans?
Payday loans are short-term unsecured personal loans that must be repaid by your next payday. To ensure that the payment will be made, the lender requires a postdated check that includes the borrowed amount, interest and fees.
Payday loans tend to carry exponentially higher interest rates than personal loans — sometimes as high as 400 percent — and can come with a plethora of hidden fees.
Because of this, they are often criticized for being predatory, particularly for borrowers with bad credit, who may not have another option for fast cash.
“The best way to identify a payday loan is any time you borrow money and you pay back the entire amount at once, normally your payday,” says Jeff Zhou, co-founder and CEO at Fig Tech. Additionally, most payday lenders don’t run a credit check; if the lender isn’t interested in your credit history, this could be a warning sign that you’re dealing with a payday lender.
How they work
Payday loans can typically be obtained through either a physical brick-and-mortar location or an online application process. To determine your rate and terms, the payday lender may request a hard credit check to view your credit score, although this is less common with a payday loan. The lender will also generally require proof of income and your pay date.
When you’re approved for a payday loan, you give the lender a postdated check that it can deposit on your next payday. If you take out an online loan, you authorize the company to take the funds from your bank account once you’re paid by your employer.
Your credit score isn’t as large of a factor with payday loans, because the lender has the authority to take its payment from your bank account when you get your next paycheck. That’s how payday lenders minimize their risk. They also can base the principal amount of your loan on a percentage of your predicted income.
Payday loans can sometimes seem too good to be true, since they’re more accessible than a personal loan or a credit card cash advance. But if you’re not careful, payday loans can be dangerous; the high rates and fees cause many borrowers to default or fall into a cycle of debt, which can cause their credit score to plummet.
Why someone would get a payday loan
Payday loans help you get the cash you need quickly, which makes them an attractive option for borrowers with poor credit or little to no financial history. Here are a few reasons why someone would get a payday loan:
- Holiday shopping: A payday loan could seem a convenient way to immediately get the cash you need for last-minute holiday shopping.
- Emergency expenses: An emergency expense a car breaking down or unexpected medical treatment can be jarring to your finances. For those with poor credit, a payday loan can seem the best option to pay for a hospital stay or car repairs.
- Cash with bad credit: If you don’t meet the credit requirements for a personal loan, payday lenders tend to require less from borrowers in terms of financial health and credit.
How to repay a payday loan
After you provide the postdated check and get approved for a payday loan, the full payment — interest and fees included — will be due on your next payday.
If your check bounces or you can’t pay the full balance on the required payday, you may have to roll the loan over to the next payday, accruing more interest in the process.
Risks of payday loans
Due to the high interest rates and hidden fees, payday loans have the potential to derail your financial health and your credit score. “Payday loans charge a high interest rate, but the biggest risk of payday loans is the fine print,” says Zhou.
The fine print can include fees change fees, mandatory subscription charges or early repayment fees, and these can all quickly add up. “The fine print can create catch-22’s that prevent you from paying off the loan,” says Zhou. “The biggest danger of payday loans is when they turn from a short-term stop gap into a long-term drain on your finances.”
If you don’t have an established plan to pay off your payday loan in full on the requested date, you’ll have to roll over your loan, meaning you’ll be responsible for the principal balance and additional fees and accrued interest. This is a vicious cycle that could land you in high-interest debt down the road.
How payday loans affect your credit
If your payday lender doesn’t require a hard credit check and you’re able to pay back the full amount by the required date, a payday loan typically won’t negatively affect your credit. If your lender does require a hard credit check, you may notice that your credit score drops a few points.
However, if your check bounces or you can’t pay the full balance on the required payday, the amount could be sent to a collection agency, which has negative consequences on your credit and financial history.
Similarly, some lenders may bring you to court in order to collect your unpaid debt. If you end up losing your case, that information could be reflected on your credit report, lowering your score for up to seven years.
Alternatives to payday loans
You might not be able to get a traditional bank loan to meet your quick-cash needs, but some of these methods to stretch your finances to the next payday might work better than a payday loan.
1. Use a credit card
If you have a credit card that’s not maxed out, you could use it to charge your expenses. Not only will your interest rate ly be lower than that of a payday loan, but you’ll have 30 days to pay back the credit card balance before it incurs interest. If you can pay back the money by your next payday, a credit card could be a cheaper option.
2. Get an installment loan
An installment loan allows you to borrow a set amount of money over a fixed time period. Some common examples of installment loans include car loans, mortgages and student loans.
You repay the loan over a certain number of payments, called installments.
Most installment loans will have a fixed monthly amount that you’re required to pay, and the amount won’t change over the course of your repayment period.
Installment loans are beneficial because they come with a predictable monthly payment. Knowing how much you need to pay each month can help you budget for your monthly installments and avoid missed payments because of unexpected fees.
Keep in mind that installment loans don’t allow you to increase the amount of money you need to borrow. If you need more funds unexpectedly, you’ll have to take out a new loan.
3. Apply for a personal loan online
It’s possible to get a personal loan with bad credit. Some online lenders, such as LendingClub and Earnest, have loans for as low as $1,000 to $2,000. Avant requires a minimum credit score of 580 FICO with an estimated APR that ranges from 9.95 percent to 35.99 percent — significantly lower than the estimated 400 percent that you’d be facing on a payday loan.
With many lenders, you can check your personal loan rates online without impacting your credit score. Once you’re approved, it’s possible to have the money sent to you within one business day.
4. Consider a credit union if you have time
Credit unions offer payday alternative loans (PALs) that allow you to borrow between $200 and $1,000 for a term of one to six months. The APR is capped at 28 percent.
But you have to be a member of a credit union for at least a month to be eligible to apply for PALs, so they won’t be the best solution if you need money immediately.
5. Turn to family and friends
Friends and family might not always be able to lend money, but sometimes they can help in ways that can lessen your expenses. For example, they can let you do your laundry at their place, which can save your costs at the laundromat, or they can make dinner for you and give you leftovers that will last until payday.
Don’t be afraid to open up to people who are close to you about your financial struggles. It takes a village — and one day you’ll be there for them, too.
6. Generate income quickly
There are a few things you can do to generate extra income quickly. One way to make extra cash is by selling some of your stuff that you can live without. Have clothes you can get rid of? Try selling them online or at local secondhand stores.
You also can explore renting out a room on Airbnb, trading in your unused gift cards for cash or cashing in any unused rewards points on your credit cards.
7. Ask your employer for an advance
Check with your employer if you can get an advance on your paycheck to tide you over. Your HR or payroll department may be able to find a way to help you out.
8. Seek leniency to reduce or delay payments
If you owe money on certain bills, it’s a good idea to call each creditor to request an extension on your balance due date until you have the money to pay it back.
Many companies will agree to this leniency or find ways to allow you to make partial payments on your bills. It’s worth checking areas where you can lower or hold off payments to get you through till payday.
9. Use emergency relief services to reduce your expenses
You might be able to save up for any upcoming payment and eliminate other expenses in your budget by using emergency aid services in your community. Here are some ways:
- Local food banks: Reduce or eliminate your grocery bill by accessing the resources of a food bank in your area while you wait for your next paycheck.
- Low Income Home Energy Assistance Program (LIHEAP): This is a program run by the federal government to help families meet their energy needs.
- Local community service agency: Many communities have nonprofit organizations that help residents in times of need. For example, Community Services Agency in Mountain Park, California, offers help with rent, utilities and back-to-school expenses. Some local churches or other religious institutions offer similar services.
10. Consider pawn loans
You could borrow money from a pawnshop by using one of your valuable items as security against your loan. The pawnbroker will hold the item and lend you an amount that typically is a portion of the resale value of the item, often for a high fee.
If you make payments on this loan, you’ll be able to redeem your item. If you stop making payments, the pawnbroker eventually will sell your item to recover its loss.
But a pawn loan is an expensive way to borrow money, with some loans charging APRs upward of 200 percent, and the term length for many pawn loans is just 30 days.
Pawnbrokers don’t report your payment history to consumer credit agencies, so if you don’t pay off your loan it won’t impact your credit. But you’ll lose the pawned item.
How to choose the best option for you
If you need money immediately, use this criteria to determine which quick-cash alternative method is right for you:
- Which loan will have the lowest interest? You might have an easier time repaying a loan if it has lower interest. In general, it might be possible to negotiate terms with lower interest rates on loans from family members and friends.
- Can you build your credit? It’s better to build your credit before you get a loan, but if that’s not possible, getting a loan from an institution that will help you simultaneously build your credit — such as a payday alternative loan from a credit union — could be a good way to get the money you need while also boosting your credit history.
- Can you repay the loan while meeting its terms? No matter the lender you use, you might be setting yourself up for trouble if you don’t have a plan to repay the loan while meeting its terms. A critical step in understanding which loan is right for you is finding one you can afford.
Payday loans can certainly be beneficial under the right circumstances.
If you have a sound financial history but just need a bit of extra cash to cover an expense, a payday loan could be a great option.
However, remember that payday loans come with risks, and if you’re not confident in your ability to repay your debt, a payday loan could ruin your credit score or even land you in court.
Before getting a payday loan, speak with banks and credit unions about your loan options and find the best rate available. The dangers of payday loans often outweigh the benefits, so ensure that you know exactly what you’re signing up for before applying.
What Is A Payday Loan And Why Is It A REALLY Bad Idea To Get One?
You’ve probably heard of payday loans, even if you’ve never gotten one. And good for you if you haven’t heard of payday loans because they are a really bad idea.
Let’s put it this way: they’re one of those financial arrangements that’s incredibly easy to get into, but painfully difficult to get .
In this article, I’m unpacking what payday loans are, and why you should look for alternatives to this type of loan.
What is a payday loan?
A payday loan is a very short-term loan. That’s short-term, as in no more than a few weeks. They’re usually available through payday lenders operating storefronts, but some are now also operating online.
Payday loans work best for people who need cash in a hurry. That’s because the entire application process can be completed in a matter of minutes. Literally!
Payday lenders will verify your income and a bank checking account. They verify the income to determine your ability to repay. But the bank account has a more specific purpose.
How do payday loans work?
When your loan is approved, the funds are deposited into the verified bank account. But even more important, the lender will require that you write a postdated check in payment of both the loan amount and the interest charged on it.
For example, let’s say that you’re granted a $500 loan on October 16. Since the loan will require repayment within two weeks, you will write a check back to the lender that’s dated for October 30. The check will be for $575 – $500 for their loan repayment, plus $75 for interest.
The postdated check ensures that the lender will be paid back by the scheduled date and that they won’t have to chase you to get it. Borrowers tolerate the postdated check arrangement because the other major component that lenders normally look at – credit history – is ignored by payday lenders.
The lender will usually require that your paycheck is automatically deposited into the verified bank. The postdated check will then be set to coincide with the payroll deposit, ensuring that the post-dated check will clear the account.
That’s why they’re called payday loans.
The reasons people take payday loans
People with poor credit are natural clientele for payday loans. The borrower can apply for the loan, and not be at all concerned that his credit is either ugly or nonexistent.
People with little or no savings represent another natural market. Most households in America live on a paycheck-to-paycheck basis. A 2019 survey by Go Banking Rates found that 69% of American households have less than $1,000 in savings. That demonstrates the enormous potential market for payday loans, and why they’re so stubbornly popular.
Since bad credit and a lack of savings often go hand-in-hand, payday lenders have a built-in market.
While many people can get by regular expenses, an emergency situation creates a need for immediate cash.
For example, if you have bad credit, no savings, and car trouble and you find out that it will take $700 to fix it.
You need the car to get to work, and since you have no available credit and no savings, you turn to payday lenders.
You may have no idea how to come up with $700 (plus interest) in two weeks, but the loan buys you some time – and you have no idea that there are actually great alternatives to a payday loan.
According to the Pew Charitable Trusts 12 million Americans take out payday loans each year, spending $9 billion on loan fees. And today, federal lawmakers are working to reduce payday loan rates from 400% to 36%.
Payday loans are used in place of emergency savings accounts, although the trust has found that many also use them for regular living expenses.
The bad part about payday loans
The most obvious problem with payday loans is the cost. We just did an example of a borrower who pays $75 in interest for a $500 loan. If that was the cost of interest for a full year, the interest rate would be 15%. That would be a decent rate for someone who has either bad credit or no credit, and is taking an unsecured loan.
But the $75 is the interest charged for just two weeks.If you annualize the interest charged for two weeks, it comes to nearly 300%. In fact, 300% is on the low end. Payday lenders often charge 400%, 500%, or even much more.
What makes it even more concerning is the fact that it is the interest rate being charged to the people who can least afford it. If a person doesn’t have $500 today, they probably won’t be any more ly to have $575 in two weeks. But that’s what they’ll have to come up with.
And that’s why it gets worse.
The REALLY bad part about payday loans
People who take payday loans often get locked into an ongoing cycle. One payday loan creates the need for a second, which creates the need for a third, and so on.
The problem is that the borrower usually needs to take another payday loan to pay off the first one. The whole reason for taking the first payday loan was that they didn’t have the money for an emergency need. Since regular earnings will be consumed by regular expenses, they won’t be any better off in two weeks.
The lender might provide continuous financing by rolling over the loan every two weeks. The borrower will have to pay the interest every two weeks, but the original loan balance will remain outstanding.
Because the borrower will have to pay $75 every two weeks, he’ll end up paying $1,950 in interest in order to gain the one-time benefit of the $500 loan.
This is another reason why payday loans rarely exceed $1,000. The payday lenders are keenly aware that the lihood of being repaid declines with the size of the loan.
And should you be unable to make good on your payday loan, lenders are among the most savage when it comes to collecting. You will not only be hounded by collection calls and threats, but you almost certainly will be slapped with a court judgment.
How to avoid needing a payday loan in the first place
The two most basic reasons why people fall into the payday loan trap are bad credit and a lack of savings. It’s not easy to overcome either problem, let alone both. But since payday loans trap you into a cycle that’s almost impossible to get , it’s worth making the effort.
Overcome bad credit
Obviously, you’ll need to make all of your debt payments on time from now on. You should also avoid incurring any new debt, since it will be difficult to repay.
But there is another exception to that rule, and that’s a credit builder loan. Let me explain: these are loans that are designed specifically for people with either no credit or bad credit. They’re offered by some banks and credit unions and are well worth having.
A credit builder loan works by giving you a loan in which the proceeds are deposited into a savings account. The monthly payments are automatically drafted the savings account by the lender to pay the loan. Loans are for small amounts, have reasonable interest rates, with terms of anywhere from 12 to 24 months.
Let’s say that you take a credit builder loan for $500. The loan will be for 12 months at 10% interest. The loan proceeds will immediately be deposited into a dedicated savings account in your name (you will not have access to the funds in the account). Each month the bank will withdraw an amount sufficient to cover the principal and interest.
The bank will then report your good payment history to the credit bureaus. The idea is that building good credit will help to offset a history of bad credit. This will increase your credit score more quickly than simply paying off bad debt.
Best of all, you won’t have to be concerned with making the monthly payments. And as far as cost, you will only have to deposit enough money into the bank account to cover the interest for one year. At 10% interest, that will be something less than $50 for the year.
Overcome a lack of savings
The only way to eliminate the need for payday loans is to become self-funding. And the only way to do that is by having cash in the bank. You’ll be able to use savings when an emergency hits, rather than turning to high-priced lenders.
But how do you build up savings if you’ve never had much in the past?
It will require sacrifice on your part and a commitment that the alternative to a payday loan is to be super disciplined about every penny you earn.
My guess is that your budget is already tightly stretched, and therefore the only way to do it will be to increase income.
You may have to take a second job or pick up some side hustles for as long as it takes to get enough money into your savings account to give you some budgetary breathing room.
You can also fast-forward the savings process by banking windfalls. Banking your income tax refund is an excellent strategy. But you could also consider selling off anything that you have but don’t need. For example, having a couple of garage sales or selling some stuff on Craigslist could easily raise a few hundred dollars.
You’ll also find that you’re going to have to continue refilling your savings account to prepare for future emergencies. But by then you’ll be in the savings habit, and it will be second nature.
It won’t be easy, but it’s the only way to avoid the dangerous and costly payday loan cycle.
Payday loans are designed to trap you in a cycle of debt. When an emergency hits and you have poor credit and no savings, it may seem you have no other choice. But choosing a payday loan negatively affects your credit, any savings you could have had, and may even cause you to land you in court.
There are alternatives to payday loans – and good ones. If you need a payday loan, choose one of these other options because getting a loan for 300-500% interest over a few weeks is just never ever the way to go.
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What Is A Payday Loan?
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If you’re ever in a pinch and need money immediately but don’t qualify for a personal loan, you might think about taking out a payday loan. A payday loan is a short-term, small loan that you repay once you receive your next paycheck, typically two to four weeks after you take out the loan. Payday loans tend to have small loan limits, usually up to $500, and don’t require a credit check.
While they might be easy for many people to get, they can be costly and harmful to you long after you borrow. Here’s how payday loans work, how they impact your credit and alternative options.
How a Payday Loan Works
You can take out a payday loan online or at an in-person location if it’s available in your state. For many payday loan lenders, there’s no credit check involved. It’s enticing for borrowers who don’t have great credit—or any credit—and need cash fast.
Once you complete an application, you’ll write a postdated check for the amount you borrow, including fees and interest, guaranteeing the lender gets paid by your next payday. If you can’t afford to repay the loan by the due date, some lenders have an option to renew or rollover your plan to extend the due date, but this will result in additional fees and interest.
Payday Loan Dangers
Payday loan lenders prey on the most vulnerable groups: those who are in dire need of funds but don’t have a good credit history to borrow from banks, credit unions and online lenders. Because lenders tout immediate funds into your account and no credit check, many borrowers who don’t need to borrow a lot of money look toward a payday loan.
But predatory lenders are everywhere, so much so that some states don’t permit payday loans. Most states regulate payday loans, including repayment terms, finance charges and the loan amount.
Even with regulations in place, interest rates can approach 400%. Conversely, personal loan interest rates can be as high as 36%, and that’s for borrowers with very low credit scores or limited credit histories.
A big danger with payday loans is the repayment period. Traditional personal loans, even those in small amounts, let you repay your loan over the course of a few months.
Payday loans, on the other hand, require you to repay the loan anywhere from 14 to 31 days after you take it out.
Many borrowers don’t have the funds to pay back the loan in this time frame and, in some cases, end up borrowing more to repay their loan, along with the extra finance charges.
Who a Payday Loan Is Right For
Payday loans are costly and can cause more harm than good. While it’s one way to get money in your hands until your next paycheck, the risks typically outweigh the benefits. We don’t recommend using payday loans. Instead, look toward alternative options, including personal loans, credit cards or even borrowing money from friends or family.
Payday Loan Costs
How much your loan costs depends on how much you’re borrowing, your interest rate, your lender and where you live. Here’s an example of the costs you may experience when you take out a payday loan.
In Iowa, you can borrow up to $500 through a payday loan, and you’ll get charged up to $15 for every $100 you borrow. If you borrow the full $500, that’s an extra $75, or $575 in total.
But your annual percentage rate (APR), which is calculated daily, will be much more than that. For example, in Iowa, you can borrow a loan for up to 31 days.
If you borrow for the full term, your true APR will be 176%.
To compare, personal loans usually cap their APRs at 36%. If you use a credit card to make a purchase, you’re ly to have an APR that’s less than 30%.
Payday Loan Borrowing Limits
Borrowing limits usually depend on where you live. Since some states don’t allow payday loans, you might not have the option to borrow money through one.
Most states cap their borrow limits at around $500, but limits vary. For example, Delaware caps its borrow amount at $1,000 while California sets a maximum limit of $300.
Repaying a Payday Loan
For many lenders, you set up a single loan repayment when you borrow the money. You’ll typically repay your loan through a postdated check, including the full amount you borrowed plus any fees and interest. However, you may also be able to pay online or through a direct debit from your bank account.
Your payment date will be between 14 and 31 days from when you borrow the loan, usually by your next payday. The loan is repaid in one payment, compared to personal loans, which have installment payments for a set number of months. Personal loan lenders look at your income to make sure you can afford what you borrow, making sure monthly payments fit into your budget.
How Payday Loans Can Affect Your Credit
Many payday loan lenders don’t run credit checks, so applying for a payday loan doesn’t impact your credit score or report. Even if you borrow the money and repay it all on time and in full, the positive payment doesn’t impact your credit, either.
But if you don’t pay your loan back in full and your payday loan lender hasn’t electronically withdrawn money from your account, you could be on the hook for the unpaid balance plus any outstanding finance charges. If you’re long overdue in payments, the lender could get a collection agency involved and the delinquent mark can go on your credit report.
Payday Loan Alternatives
Payday loans aren’t a good option in almost every circumstance. If you can, explore all your other options before taking out a payday loan, including:
- Personal loans. While many personal loan lenders only approve borrowers with at least fair or good credit, there are some lenders that tailor to borrowers with poor or subprime credit scores. Some credit unions have payday loan alternatives, letting borrowers take out loans up to $1,000, depending on the institution. Credit unions are not-for-profit and are more ly to work with borrowers who don’t have great credit.
- Credit cards. If you already have a credit card, consider using it to make a payment or purchase. APRs are lower compared to payday loans and since you already have one, you don’t have to qualify for one. Most cards also offer a cash advance—which allows you to withdraw cash from an ATM—but these transactions come with high APRs and additional fees. However, both options are cheaper than payday loans.
- Borrow money. If you don’t need to borrow much, ask friends or relatives to cover you until you can streamline expenses. Many times, borrowing money from loved ones means you have a little bit of flexibility when it comes to repaying your loan, and often without interest. If you choose this route, agree on terms and conditions that outline how to repay your loan and what happens if you can’t repay it.
In addition to these alternatives, review your financial situation carefully, including your required payments and monthly expenses, to see if you can free up some funds.
For example, go over your budget and see if some not-so-dire expenses can wait.
You might find you have enough spare cash to cover your needs until your next payday, allowing you to avoid the possible pitfalls that come with a payday loan.
What Is a Payday Loan?
A payday loan is a high-cost, short-term loan for a small amount — typically $500 or less — that’s meant to be repaid with the borrower's next paycheck. Payday loans require only an income and bank account and are often made to people who have bad or nonexistent credit.
Financial experts caution against payday loans — particularly if there’s any chance the borrower can't repay the loan immediately — and recommend alternative lending sources instead.
What is a direct payday loan?
Online payday loans may go through a direct payday lender, which makes its own decisions about loans, or a broker, who sells your loan to the highest bidder.
Choosing a lender that uses a broker is riskier because you don’t know who you’re giving your financial information to. Not only is there a greater risk of fraud and unwanted solicitation with a broker, but it can also increase the overall cost of the loan.
If you must take a payday loan, choose a direct lender.
How much does a payday loan cost?
The cost of a loan from a payday lender is typically $15 for every $100 borrowed, according to the Consumer Financial Protection Bureau. For a two-week loan, that’s effectively a 391% APR.
If the loan isn’t repaid in full on the first payday, a fee is added and the cycle repeats. Within a few months, borrowers can end up owing more in interest than the original loan amount. According to the Pew Charitable Trusts, borrowers pay an average of $520 in fees to borrow $375.
That’s why payday loans are risky — it's easy to get trapped in a cycle of debt and expensive to get out.
How much can I borrow with a payday loan?
The amount you can borrow varies according to your state’s laws and your finances. Most states that allow payday lending cap amounts somewhere from $300 to $1,000. Check your state's payday lending statutes.
This doesn’t mean you’ll be approved for the highest amount allowed by law. A payday lender may consider your income when deciding how much you can borrow. However, other payday lenders may not evaluate your ability to repay, or your other obligations, leaving you at risk for financially overextending yourself.
Does paying back payday loans build credit?
Paying back a payday loan doesn't usually build credit. Most payday lenders don’t report on-time payments to credit bureaus, so the loan can't help your credit score.
If you don’t pay the loan back, however, your credit can be damaged. The payday lender may report the default to the credit bureaus or sell the debt to a collections agency that will do so, which will hurt your score.
» MORE: How to build credit
What do I need to get a payday loan?
To qualify for a payday loan you typically need an active bank account, an ID and proof of income such as a pay stub. You must be at least 18 years old. Some lenders also require a Social Security number.
You still can be rejected for a payday loan, despite having income and a bank account. Lenders that charge APRs over 36% aren’t legally allowed to lend to active-duty military, their spouses and their dependents, for example.
What happens if I can't repay a payday loan?
Depending on the lender and the state you live in, you could be charged a late fee or a nonsufficient fund fee. You may have a rollover option to extend the due date, but that usually comes with a fee. Failed attempts to acquire payment can also trigger bank fees against you.
If a lender is unable to collect the funds, your loan can be sent to a collections agency.
» MORE: What to do if you cannot repay a payday loan
Payday loan alternatives to consider
Use an interest-free cash advance app. Mobile apps Earnin, Dave and Chime can offer interest-free advances on your paycheck up to two days ahead of time, though there are eligibility requirements and caps on how much you can borrow.
Get a personal loan from a credit union or online lender. A personal loan will ly carry a lower APR than a payday loan, so it’s more affordable. Credit unions tend to offer the lowest rates for bad-credit applicants, but you’ll need to be a member. Online lenders also serve bad-credit borrowers and can fund loans the next business day, but rates may be higher.
» COMPARE: Bad credit loans from online lenders
Borrow money from a family member or friend. A loved one may be able to spot you the funds. This will save you money on interest, and you won’t have to undergo a credit check. Just make sure you agree to the terms of the loan, such as when you’ll pay it back.
Reach out to a community organization. There are local and regional organizations that provide free funds to cover essential expenses. Check NerdWallet’s database of local alternatives to payday loans to see what’s available in your state.
Once your immediate cash emergency passes, start building an emergency fund. If you can save even a few hundred dollars over time, then you’re repaying yourself rather than the lender when emergencies arise.
» MORE: 9 alternatives to payday loans to consider during a crisis
Payday loan alternatives to avoid
Long-term, high-interest installment loans: These loans extend repayment terms to as long as five years. You don’t need good credit — some may advertise themselves as no-credit-check installment loans — but you typically must meet the requirements of a payday loan. Interest charges mount quickly: A $3,200, two-year loan at 87% APR will end up costing $6,844.
Auto title loans: These short-term loans, where they’re legal, require you to hand over the title to your vehicle as collateral for the debt. They’re often compared with payday loans, but they can be even worse: If you don’t repay, the lender can seize your car.
Frequently asked questions
A payday loan is a high-cost, short-term loan for a small amount (typically $500 or less) that’s repaid with your next paycheck.
How do I get a payday loan?
You can apply for a payday loan at a storefront payday lender or online. Most lenders require only proof of income and a bank account. You must be 18 and show ID.
Why are payday loans bad?
Payday loans are expensive and can easily create a cycle of debt. Because of the high interest rate, many people end up owing more than they originally borrowed.