A payday loan is a type of short-term, unsecured personal loan, typically for $500 or less, and typically due on your next payday. The loan amount is based on your income and to qualify you need an active bank account, valid ID and proof of income (payslip).
Payday loans are known to have very high interest rates. For this reason you should only apply for a payday loan if you are sure you can repay it.
Also known as:cash advance loans, check advance loans
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How do personal loans work?
Payday loans work a little differently than other types of personal or consumer loans. Depending on the lender and where you live, you may be able to get a payday loan online or at a brick-and-mortar institution. You should be aware that payday lending is illegal in many states, which we’ll talk more about in a minute.
When you apply for a payday loan, the lender confirms your income with a pay stub and collects your checking account information. If you are approved, the lender will provide the loan in cash, check, or direct deposit.
If you get a payday loan at a brick-and-mortar location, the lender will disburse the money and you will have to leave a post-dated check for the loan amount, plus interest. This check is payable on or about your next payday. If you apply for the loan online, the lender deposits the funds electronically and gets permission to automatically debit your bank, credit union or prepaid card account.
You will be charged a fee if you can’t repay the loan by your next payday, then the cycle repeats. If you are unable to repay the loan, you must tell your lender so that the lender can renew it. Otherwise, the creditor may simply deposit the postdated check, exposing you to possible bounced check fees due to insufficient funds.
How can I get a payday loan?
If payday loans are legal in your state (more on that later), you’ll find no shortage of options. Physical stores are not difficult to find, but several online alternatives are also available. You need proof of income and an active checking account to qualify for a payday loan, and you must be at least 18 years old.
Do personal loans have additional costs?
Payday loans come with interest and additional fees: For every $100 borrowed, fees tend to range from $10 to $30. Typically, a two-week loan comes with fees of $15 per $100 borrowed. loan.
While this may seem like a small amount, that’s an annual percentage rate (APR) of 400% for a two-week loan or a daily interest cost of $1.07.
Are Payday Loans Illegal?
Payday loans are considered predatory and are illegal in 21 states and Washington, D.C., as of 2024. According to the nonprofit Consumer Federation of America, payday loans are prohibited in the following states, as per definitively or due to tariff limits:
- Arizona
- Arkansas
- Colorado
- Connecticut
- Washington DC
- Georgia
- Hawaii
- Illinois
- Maryland
- Massachusetts
- Minnesota
- Montana
- Nebraska
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- Pennsylvania
- South Dakota
- Vermont
- West Virginia
In New York, where all payday loans are illegal, the state Department of Financial Services has described the product as designed to trap borrowers in debt. The state also prohibited the collection of payday loan debt.
Efforts to regulate payday lending began in 2017, when the Consumer Financial Protection Bureau introduced rules to protect consumers from “payday debt traps.” Starting in 2022, payday lenders will no longer be allowed to collect payments from borrowers’ bank accounts in a way that results in excessive fees, among other restrictions.
The Federal Trade Commission, or FTC, has also implemented several laws to protect consumers from predatory lending practices. The agency found that payday lenders engaged in deceptive advertising and billing practices, as well as abusive collection practices.
Alternatives to personal loans
As mentioned above, you should not take out payday loans lightly. They are very risky and you can quickly double or triple your debt. You should only use payday loans as an absolute last resort when you have no other choice.
Before you go down the payday loan path, consider the following:
Alternative payday loans: These loans are available through credit unions and are similar to payday loans in the loan amount for which you can be approved. However, they have a different fee structure and, most importantly, a longer term. While this is still a short-term loan, alternative payday loans allow up to six months to repay the funds. You must have been a member of a credit union for at least a month to qualify, although not all credit unions offer this alternative.
Payment Plans: If one of the reasons for your financial difficulties is existing debt, consider asking your creditors for a payment plan before going into further debt with a payday loan. Many creditors prefer to work with their borrowers rather than go through the internal collection process and/or sell the debt to a collection agency. This is not to say that all lenders will work to help you, but you should check before applying for a payday loan.
Financial advice: Working with a credit counselor is a safe and affordable (or even free) way to manage your debt. Several nonprofit credit counseling agencies can negotiate your debt, often resulting in better interest rates or lower repayments. Counseling agencies may also provide you with basic personal financial tools to help you set yourself up for success.
Friends and family: While it may be difficult, asking your family and friends for help during a time of financial need is still a better alternative to a payday loan.
Summary for Payday Loan Guide
If you’ve explored all other options and are still considering payday loans, be sure to do your due diligence. You should ensure that you are aware of the excessive fees and interest rates associated with payday loans, and you should always ensure that you are able to repay the loan plus interest. If you’re not sure you can meet the obligations of a payday loan, it’s probably not the right financial decision for you