What Is A Payday Loan?

With nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting a budget or starting to invest. Her work has been featured in the New York Times, Wall Street Journal, CNN, Yahoo, TIME, AP, CNET, New York Post and more.

Dori Zinn

Dori ZinnLoans Writer

Loans Writer

Jordan TarverLead Editor, Mortgages & Loans

Jordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top performer in the mortgage industry and his entrepreneurial success to simplify complex financial topics. Jordan aims to make mortgages and loans understandable.

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Jordan Tarver

Jordan TarverLead Editor, Mortgages & Loans

Lead Editor, Mortgages & Loans

Reviewed

Updated: Apr 22, 2024, 11:12am

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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 Does a Payday Loan Work?

You can take out a payday loan online or at an in-person location if it’s available in your state. Most payday loan lenders allow you to get a loan with no credit history or co-signer, and they can be guaranteed loans. It’s enticing for borrowers who don’t have great credit—or any credit—and need cash fast. However, some personal loan scams steal your personal information under the guise of no-credit loan offers, so keep an eye out for any red flags that could save your information.

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.

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.

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.

Are Payday Loans Dangerous?

Payday loans can be dangerous, often due to high interest rates and fees. These loans often need to be repaid by your next payday, which can be challenging for many borrowers.

The typical payday loan is $350 and comes with a $15 fee per $100 borrowed, according to the Consumer Financial Protection Bureau (CFPB). With a repayment period of two weeks, that equals a nearly 400% annual percentage rate (APR).

If you fail to repay a payday loan on time, the cost of borrowing only grows—and according to the Federal Reserve Bank of St. Louis, 91% of payday loan borrowers can’t repay their loan when it comes due. With rollover fees, or the cost of rolling over the balance to your next paycheck, payday loans can be as expensive as APRs of 780%.

If you take on a payday loan and can’t repay it, you can end up owing more than you originally borrowed. Eventually, that can lead to a cycle of debt that’s difficult to recover from.

Before taking on a payday loan, consider all of your options and if there are other, more affordable ways to get the money that you need. The best emergency loans for bad credit typically offer flexible repayment terms, a range of loan amounts and interest rates up to 36%. A personal loan calculator can help to estimate your monthly loan costs.

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 can outweigh the benefits. We don’t recommend using payday loans. Instead, look toward alternative options, including personal loans, credit cards or payday alternative loans.

How Payday Loans Can Affect Your Credit

Many payday loan lenders offer a no credit check loan, 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

In most cases, there are better financing options than payday loans. If you can, explore all your other options before taking out a payday loan, including:

Personal loans. If you have limited or poor credit and unstable income, there are options available for other personal loans, including unemployment emergency loans. These lenders can offer flexible repayment terms and transparent interest rates and fees.
Payday alternative loans. Some credit unions offer payday alternative loans, which are intended to be a lower-cost alternative to payday loans. These loans are limited to $2,000 and come with loan terms from one to 12 months.
Credit cards. Credit cards can have a lower APR than what’s offered on payday loans, making it a cheaper option to finance a purchase. Before accumulating credit card debt, know what you can afford to repay and have a plan to do so.
Cash advance apps. Cash advance apps allow you to borrow against your next paycheck, similar to a payday loan. Although these loans typically have high interest rates and fees, they can offer cash quickly with transparent costs.
Friends and family. If you don’t need to borrow much, ask friends or relatives to lend you money. 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.