Payday loans are short-term, high-interest loans that lenders make based on your income. The amount of the loan is generally equal to a portion of your next paycheck.
Payday loans can provide quick cash, but they charge very high interest rates and are often cited as a form of predatory lending. Even if you have bad credit, it's important to check out your other options, such as a personal loan or an emergency loan, before considering a payday loan. Here is what you need to know.
Key Takeaways
- Payday loans are short-term, very-high-interest loans for individuals.
- Payday loans are typically based on how much you earn, and you usually have to provide a pay stub when applying for one.
- Payday loans are not available in all states, with some states outlawing them altogether.
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How Payday Loans Work
Payday loans go by a number of names in different places around the country, and there is no universally accepted definition for them. But they are typically short-term loans for amounts of $500 or less. In general they must be repaid in full on the borrower's next payday, or when the borrower receives other income they have coming due, such as a Social Security payment. As such, they typically have terms of two to four weeks.
Payday loans are characterized by their high interest rates. According to the Consumer Financial Protection Bureau (CFPB), "A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent."
At the time of the loan, the borrower will usually authorize the lender to automatically deduct the funds from their bank account on the due date if they haven't already made their payment or else write a post-dated check to cover the balance plus interest and fees. In some states, borrowers who are unable to repay the loan at that point can roll it over into a new loan, digging themselves further into debt.
Allowing payday lenders access to borrowers' bank accounts has created problems in its own right. According to the CFPB, some lenders have made repeated attempts to withdraw money from borrower accounts, even after it's clear the money isn't there. (In once instance, the CFPB said, a lender made 11 attempts in a single day.) As a result, borrowers can be subject to multiple overdraft or nonsufficient funds fees from their banks. A new CFPB rule limiting lenders to two such attempts is scheduled to go into effect in March 2025, after surviving a challenge from the payday lending industry that went all the way to the U.S. Supreme Court.
How to Get a Payday Loan
If you wish to, you can apply for payday loans at various online providers or local storefront lenders.
For a payday loan application, you will need a bank or similar account and a government ID. You will also need to provide proof of income, which can be done through your recent work pay stubs.
Payday lenders will not normally run a credit check on you. Their loans are also unsecured, meaning that you don't have to put up any collateral as you would, for example, with a car loan. However, as mentioned earlier, you will have to give the lender authorized access to your bank account or write a post-dated check for the full amount you'll owe.
Important
Some federal credit unions offer what they call payday alternative loans (PALs). These lower-rate loans can range from $200 to $1,000, with terms of one to six months.
Payday Loan Interest Rates
While most states have usury laws that limit interest charges to anywhere between 5% and 30%, payday lenders fall under exemptions that allow them to charge many times that in certain states.
Currently 37 states have laws that permit payday loans, although many put some restrictions on them and some prohibit them altogether.
In California, for example, a payday lender can only lend up to $300 at a time. It can also charge a fee of up to 15% of the loan amount, with a maximum fee total of $45. Although 15% doesn't seem exceptionally high, on a 14-day loan, it becomes the equivalent of an APR of 460% for a $300 loan.
While the federal Truth in Lending Act requires payday lenders to disclose their finance charges, many people apparently overlook the costs in their hurry to get the cash.
Are Payday Loans Fixed or Variable?
Payday loans are usually meant to be paid off in one lump-sum payment when you get your paycheck. Because of this, the interest rate on these loans is fixed. In fact, many payday lenders don't even express their charges as an interest rate, but they instead charge a fixed flat fee that can be anywhere from $10 to $30 per $100 borrowed.
Is a Payday Loan Secured or Unsecured?
Most payday loans are unsecured. This means that you do not have to give the lender any collateral or hand over a valuable item as would to get a pawn shop loan.
Can You Get a Payday Loan Without a Bank Account?
If you don't have a regular bank account, some payday lenders will accept a credit union account or prepaid card account instead.
How Long Do Payday Loans Stay on Your Credit Record?
Payday lenders do not normally report to the credit bureaus, so the loan is unlikely to appear in your credit reports or affect your credit score, as long as you pay it off in time. If you default on the loan, however, and it's turned over to collection agency, that could show up on your credit reports and damage your credit score.
Can Payday Loan Debt Be Discharged in Bankruptcy?
Yes, a payday loan, like many other types of debts, can be discharged in bankruptcy. However, you could face legal problems if you took out the loan shortly before filing for bankruptcy and the lender accuses you of fraud.
The Bottom Line
Payday loans are designed to cover short-term expenses, and they can be taken out without a credit check or providing any collateral. The catch is that these loans charge very high fees and interest rates. If you're considering a payday loan, then you may want to first take a look at alternative emergency loans for bad credit.
