This article was fact-checked and reviewed by Brad Stevens, a business loans consultant with an MBA in finance. Content has been updated for 2021.
What is a payday loan?
Payday loans are small loans, usually under $1,000, meant for emergencies. Unlike other loans, lenders don’t require you to have good credit — and many won’t check your credit score with the big three credit bureaus.
Since payday loans are repaid within a week to 31 days, they have a high annual percentage rate (APR). In many cases, your APR can be 300% or higher. But some of the best payday lenders have more reasonable fees.
The application can be done online from a mobile device or computer, although some lenders also allow you to apply over the phone or by visiting a store.
To repay your loan, you will either need to provide your lender with access to your bank account for an automatic transfer or sign a post-dated check.
Are payday loans legal?
It depends on where you live. Some states prohibit payday loans by enforcing a cap on interest rates. Other states restrict how much payday lenders can charge or impose other regulations to protect borrowers.
Unfortunately, many states allow payday lending without enforcing heavy regulations. This can put borrowers at a disadvantage and allows lenders to charge fees that lead to APRs of 700% or higher.
A loan connection service works to pair borrowers like you with a suitable lender. They don’t provide loans. Instead, they compare your application against a network of lenders and show you which best fit your needs and situation.
Most loan matching services don’t charge a fee for their services. Their money comes from generating leads or referring you to direct lenders, similar to a commission. Some also function as a lender subscription service.
A payday loan matching service is a solid solution if you’re short on time and need a little help with comparing your offers. By submitting just one application, you’re able to compare offers without the labor of finding a series of reputable lenders.
How much do payday loans cost?
Payday loans generally have fixed fee from $10 to $30 for every $100 borrowed. However, it varies based on your state laws and the amount you borrow.
On average, the APR works out to around 400%. Typical ranges are from about 390% to 780%. For credit cards and personal loans with standard banks, the APR is a lot lower. For example, the national average APR for credit cards is around 15%.
To give you an example of how APR works with short-term loans, take a $200 loan amount with a loan fee of $30. If you have a repayment term of 12 days, your APR would come out to 456.25%.
Your loan agreement should outline the total cost of your loan as well as any additional fees. If you don’t understand the costs, speak with a customer service representative before signing.
When should I consider a payday loan?
A payday loan is designed to help you in an emergency. They might be useful in the following situations:
You have bad credit and need money fast. If you have bad credit, most options that are available to you on short notice are expensive. In this situation, a payday loan might be the least-expensive option out there.
You need less than $500 and need money fast. Loans under $500 on short notice can also be difficult to come by, regardless of your credit score. Payday loans are one of your few options.
You need money today. Payday loans are one of the few financing options available the same day — especially if you don’t have perfect credit, a car to use for collateral or need money on the weekend.
You don’t have a bank account. You need a checking or savings account to qualify for most types of loans. However, some payday lenders don’t require you to have a bank account and instead offer the funds in cash or on a debit card.
You don’t have a salary. A payday loan might be one of the few options out there if you rely on alternative sources of income, such as government benefits, a pension or alimony.
Payday loans vs. overdrafting your account
Overdrafting your account can be the closest alternative to taking out a payday loan — it’s fast, you don’t need good credit and you can get the money instantly. But it could actually cost more.
Most payday loans come with a $10 to $15 fee per $100 borrowed, depending on where you live and the lender. The average overdraft fee is $30, according to the Federal Deposit Insurance Corporation (FDIC). In this case, an overdraft fee might only be cheaper if you borrow more than $200 or $300.
When should I avoid payday loans?
Generally, you might want to stay away from payday loans in the following situations:
You live in a state where payday loans are illegal. Payday loans aren’t legal in all states. Check your state’s laws to avoid borrowing from an illegitimate lender.
You have time to qualify for a less-expensive alternative. The main advantage of payday loans is that they’re fast and available to borrowers with less-than-perfect credit. But there are payday loan alternatives that are significantly cheaper and come with fewer risks.
You have ongoing financial problems. A payday loan is a short-term solution to temporary problems. If you have ongoing financial difficulty, consider talking to a credit counselor who can walk you through your other options instead.
You already have a payday loan. Rolling over your payday loan can get you trapped in a cycle of debt and cost you three or four times the amount you borrowed in fees. If you’re struggling to repay a payday loan, also consider credit counseling.
You need more than $500. Most states cap payday loans at around $500. If you need to borrow more, this isn’t the right type of loan for you.
You don’t think you can pay it back. Many states require payday lenders to make sure you have enough income to repay your loan. But even if yours doesn’t, borrowing money you’re unable to repay will land you in an even worse financial situation.
Looking for a specific amount?
Payday loans are meant to cover small expenses — as low as $50.
From pay advance apps to payday loans, you have options.
Payday loans can be risky. Before you apply, make sure this choice is right for you and know your state laws.
Step 1: Consider your other options.
A payday loan — or any short-term loan — can be very expensive and get you caught in a cycle of debt. Before you borrow, consider the alternatives to a payday loan. When you’ve exhausted those options and believe a payday loan is your best bet, follow these steps to ensure you get a good deal.
Step 2: Understand your state laws.
Every state has different payday loan laws. Some have banned them entirely, while others place restrictions on lenders to help borrowers avoid high interest rates.
Research the laws of your state to learn more about what a lender can charge, how much you can borrow and what the turnaround will look like. This will help you spot any discrepancies between government regulations and your lender, helping you to avoid a scam and find a legit payday loan.
Step 3: Choose the right type of loan.
If you need to cover an emergency expense under $500, then a payday loan may be appropriate. Otherwise, you should look at your other short-term loan options.
Payday loans. Payday loans are typically between $100 and $500, though some lenders offer loans up to $1,000. These have a quick turnaround — generally between two and four weeks — and may have an APR well over 300%.
Installment loans. Installment loans come in larger amounts than payday loans, sometimes up to $5,000. You repay your loan in installments over six to 18 months. While the APR is typically lower than a payday loan, it can cost more over all — the longer your loan term, the more you’ll pay in interest.
Auto title loans. Auto title loans use your car’s title as collateral. This results in larger loan amounts and a lower APR, but you risk losing your car if you default. And because terms are similar to payday loans, it can be difficult to repay without extending your term and paying more in fees.
Step 4: Compare lenders.
Not all payday loans were created equal. Different terms, rates and loan amounts will affect the way your loan works. By shopping around, you can eliminate lenders that offer lower amounts than you need or don’t operate in your state. And once that’s done, you can compare multiple payday loan providers to find a lender that fits your needs.
Step 5: Check the lender’s requirements.
Once you’ve found a lender, check its requirements before submitting an application. While eligibility criteria vary by lender, most ask that you meet the following requirements at a minimum:
Proof of income, such as a pay stub or benefits letter
Valid bank account
Social Security number
Age of majority in your state
US citizen or permanent resident
How to apply for a payday loan in 4 steps
A payday loan application shouldn’t take more than 10 minutes to complete, but you’ll want to make sure all the information you submit is accurate to increase your chances of approval.
Step 1: Gather your personal information.
When you apply, have information about yourself, your employer and your finances ready. This will help make the application process quick, and you’re less likely to submit incorrect information — saving you from rejection.
Step 2: Go to the lender’s website or visit a storefront.
Most lenders have online applications you can fill out on their websites. But if you aren’t comfortable submitting your information online — or need your funds the same day — then visiting a storefront might be the way to go.
Step 3: Complete the application.
Completing a payday loan application should only take a few minutes if you have the information you need on hand. Lenders typically ask for your personal details — including your Social Security number and bank account numbers. Once you submit your application, it may take a few minutes to receive an answer.
Step 4: Review your loan agreement and sign it.
If you’ve been approved, your lender will supply you with a loan agreement. This should include a clear warning on the cost of short-term loans as well as your loan term, APR and the fees you’ll have to pay. Read this carefully and note the full cost of your loan before you sign the contract. If you think the repayments will be more than you can afford, you’re under no obligation to accept the loan agreement.
5 common eligibility requirements
Like the application process, the specific requirements you need to meet will vary by lender. However, most lenders have similar criteria:
Open checking account
Employed or receiving regular benefits
Regular source of income
US citizen or permanent resident
At least 18 years old
And while payday loans are meant for bad credit, meeting these eligibility requirements doesn’t guarantee that you will be approved for a loan. If a lender offers guaranteed approval, you should steer clear — it’s likely a scam.
You may also be approved if you’re self employed. To increase your chances of approval, you’ll need to show evidence of a regular income, which you need to do by supplying bank statements. Some lenders won’t consider self-employed applicants regardless, but others will. You can check the eligibility criteria before you apply.
Most students don’t have steady enough income to get approved for a standard loan. Short-term loans, on the other hand allow students to access emergency funds they can repay when they get income from other sources.
Most lenders require students to provide their identification details and show they can repay their loans by providing 90 days worth of bank statements. The online application and approval process removes the need for any paperwork or face-to-face meetings, allowing you to possibly get your money faster.
Remember that you may be required to pay for the loan in less than a month depending on the terms of your particular loan, and that the interest rates are a lot higher than what you’d normally find in a personal loan.
Instant options available, even on the weekend
A lender may be able to fund your loan as soon as you’re approved if you visit a store — potentially even on a Sunday, depending on the lender’s hours. Some online providers and lenders that offer debit cards may also be able to fund your short-term loan instantly.
You may face higher fees if you go for an instant option. Depending on your state, there may be limits to these charges — check your local APR regulations before you apply.
What happens after I apply for a payday loan?
Most lenders will notify you of a decision a few minutes after you submit your application. If you’re applying online, lenders can typically deposit the funds into your bank account within one to two business days. If you apply in store, you may be able to receive your funds before you leave via cash or check.
When it comes time to repay, your lender will deduct the principal amount and any fees you owe from your bank account — or cash the check you left. Make sure you have enough money in your bank account on your due date. Otherwise, you could face steep nonsufficient funds (NSF) fees and overdraft fees from your bank.
Reasons why you might have been rejected
While your lender should provide a reason you weren’t approved for a payday loan, these are four of the most likely reasons:
You aren’t employed or your income is too low.
You already have a payday loan or recently borrowed one.
You have too many current debts.
You had errors on your application.
Common payday loan fees
These are the most common fees when you borrow a payday loan — but the exact fees will depend on your lender and your state.
Financing fee. The amount you pay to borrow a loan.
Rollover fees. An additional fee if you choose to pay off your payday loan with a new loan.
Late payment fees. A fee charged if you are unable to make a payment.
Returned check or nonsufficient funds (NSF) fees. A fee if your check doesn’t clear or a lender is unable to withdraw your payment from your bank account.
Will I have to pay interest?
Not usually. Payday loans have a high APR, but it isn’t because of a high interest rate. APR is an expression of the loan’s total cost as a percentage, which includes both interest and fees.
Since payday loans have such short terms — sometimes as little as seven days — there’s not enough time for interest to add up to a profit. When it comes to payday loans, a high APR is a reflection of the loan’s high fees, not its high interest rate.
Where payday loans fall short
Payday loans have some of the shortest terms and highest fees, which make them one of the most expensive forms of credit.
Smaller loan amounts. How much you can borrow depends on the state you’re in, but most lenders offer loans between $100 to $1,000.
High fees. Payday loans have much higher APRs than other forms of credit. Most states regulate how much a lender can charge, but this may still result in an APR over 300% — and sometimes over 1,000%.
Short loan terms. Because payday loans are designed to be short-term solutions, you generally won’t find a loan that extends beyond six months, although terms differ by state.
Payday alternative loans (PAL). Some federal credit unions offer PALs between $200 and $1,000 to all credit types. APRs are capped at 28% and terms range from one to six months. But you need to be a member of the credit union for at least a month to qualify.
Lending circles. You can take part in a rotating savings club to get a hand up and help someone else out when you’re able.
Employer paycheck advance. Some companies offer paycheck advances or short-term loans to employees — regardless of your credit history — often at a lower cost than a payday loan.
Government resources. If you’re experiencing a long-term financial setback, look into government resources available to residents of your state to help you cut down on living expenses.
In addition to payday loans, many lenders offer installment loans. These allow you to borrow a larger amount — usually between $1,000 to $5,000 — for up to 18 months. But because you have more time to pay, there’s also more time for interest and fees to add up.
While title loans are less expensive than payday loans, they’re still a pricey option. And if you default, you could have your car repossessed.
You should also be careful when considering tribal loans. These aren’t regulated by state governments, which means you could pay extremely high fees when you borrow.
Finally, connection services allow you to browse multiple lenders. However, these aren’t regulated — and some may direct you to tribal lenders or other connection services.
And while they can be expensive, pawn loans let you put up valuables you may have around the house as collateral. But you won’t have access to what you use again until after you pay back the loan in full — plus any fees.
Frequently asked questions
Answers to common questions about payday lending.
Will borrowing a payday loan impact my credit? Most payday lenders won’t send your information to the main credit reporting agencies: Equifax, Experian and TransUnion. However, they may send information on your loans and repayments to smaller credit reporting agencies, like Teletrack or LexisNexis.
The main danger to your credit score is payments. If you’re late on or miss repayments, your credit score could be negatively affected.
Your lender may also choose to take legal action to bring in unpaid loans or pass your loan on to a debt collection agency, which will affect your credit score.
What happens if I can’t repay my loan? Like most things about payday loans, it ultimately depends on your state laws. If you default, your lender will likely turn your debt over to a collection agency.
While you can’t face criminal charges for defaulting on a payday loan, your lender can sue to cover what you owe. A lender or debt collector can only garnish your wages if it has obtained a court judgment.
How do I know the lender I’m applying with is safe? Check the lender’s state licenses, online reviews and contact information. If you can easily find out how to get in touch with a representative and find its license to operate in your state, then your lender will likely be legitimate.
However, it still pays to be careful. Some scams have been known to adopt the logo and website design of popular lenders.
Always confirm that the lender you choose is the real thing before submitting any personal information online or over the phone. And read more about payday loan scams with our guide.
What is an ACH authorization? An ACH authorization gives permission to withdraw money from your checking or savings account. Unless you can make payments by check, you will need to sign an ACH authorization.
Before you do, make sure you know how much will be debited and on what dates — and how to revoke the authorization.
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