What Is a Payday Loan?

A payday loan is a high-cost, short-term loan for a small amount – usually $500 or less – that is supposed to be repaid with the borrower’s next paycheck. Payday loans only require income and a bank account and are often given to people who have bad or no credit.

Financial experts warn against payday loans — especially if there’s a chance the borrower won’t be able to repay the loan right away — and recommend other sources of lending instead.

A payday lender will confirm your income and checking account information and deliver the money to you in as little as 15 minutes at a store or, if the transaction is done online, the same day.

In exchange, the lender will ask for a signed check or permission to electronically withdraw money from your bank account. The loan is due immediately after your next payday, usually in two weeks, but sometimes in a month.

If the loan is issued in a store, the lender will make an appointment for you to return when the loan matures. If you do not show up, the lender will execute the check or withdraw the loan amount plus interest. Online lenders use electronic withdrawal.

Online payday loans can go through a direct payday lender, who makes their own lending decisions, or through a broker, who sells your loan to the highest bidder.

Choosing a lender that uses a broker is more risky because you don’t know who you are giving your financial information to. Not only is there a greater risk of fraud and unwanted solicitation from a broker, but it can also increase the overall cost of the loan.

If you need to take out a payday loan, choose a direct lender.

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 an APR of 391%.

If the loan is not repaid in full on the first payday, a fee is added and the cycle repeats. Within months, borrowers may end up owing more 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 caught in a cycle of debt and it’s expensive to get out of it.

The amount you can borrow varies depending on your state’s laws and your finances. Most states that allow payday loan caps are between $300 and $1,000. Check your status payday loan laws.

This does not mean that you will 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 assess your repayment capacity or other obligations, putting you at risk of overstretching yourself financially.

Paying off a payday loan generally does not create credit. Most payday lenders don’t report on-time payments to credit bureaus, so the loan can’t improve your credit score.

If you don’t repay the loan, however, your credit may be damaged. The payday lender can report the default to the credit bureaus or sell the debt to a collection agency who will, which will hurt your score.

To qualify for a payday loan, you usually need an active bank account, identification, 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 can still be turned down for a payday loan, despite having income and a bank account. Lenders who charge APRs above 36% are not legally allowed to lend to active duty military personnel, their spouses and dependents, for example.

Depending on the lender and the state you live in, you may be charged late fees or insufficient funds fees. You may have a deferral option to extend the due date, but this usually comes with a fee. Failed attempts to acquire payment may also incur bank charges against you.

If a lender is unable to collect the funds, your loan may be sent to a collection agency.

Use an interest-free cash advance application. Mobile apps like To earnDave and Chime can offer interest-free advances on your paycheck up to two days in advance, although 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 likely have 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 will need to be a member. Online lenders also serve borrowers with bad credit and can fund next business day loans, but rates may be higher.

Borrow money from a family member or friend. A loved one may be able to trace the funds to you. This will save you money on interest and you won’t have to submit to a credit check. Just make sure you agree to the terms of the loan, such as when you’ll pay it back.

Go to a community organization. There are local and regional organizations that provide free funds to cover essential expenses. To verify NerdWallet local alternatives database payday loans to see what’s available in your state.

Once your immediate cash emergency has passed, start building a emergency fund. If you can save even a few hundred dollars over time, you’re repaying yourself rather than the lender in an emergency.

Long-term, high-interest installment loans: These loans extend the repayment terms up to five years. You don’t need good credit — some may look like installment loans no credit check – but you usually have to meet the requirements for a payday loan. Interest charges add up quickly: a $3,200 two-year loan at 87% APR will end up costing $6,844.

Auto Title Loans: These short-term loans, when legal, require you to return the title to your vehicle as security for the debt. They’re often compared to payday loans, but they can be even worse: if you don’t pay back, the lender can seize your car.