Payday loans explained

What are payday loans?

Also known as “bad credit”, “cash advance loans” or as short-term, payday loans are popular today and used by millions of Americans to finance their immediate needs for money. They are special personal loans, featured by a limited borrowable amount, short-term repayment, and most importantly, very high interest rates. Payday loans are meant to meet the quick demand of cash by people who need it, bypassing most of the requirements of traditional personal loans. The convenience lies basically in the time factor.

A payday loan has usually an income-based set interest: the principal balance is a fraction of the next paycheck, hence the name of this type of loan. Thus, when you apply for a payday loan, you are asked to provide a pay stub, which the lender uses to determine what rate you can afford.

Since no credit score at all is required, payday loans cater to borrowers with subpar financial conditions, who typically receive low incomes and have extra costs to face on top of the basic expenses, until the next payday.

These loans are provided both by storefront lenders and online servicers. The set conditions vary greatly depending on your financial situation, the lender in question, and State laws. The amounts that are generally granted space between $100 and $1,000, in many cases $300-$500, to be repaid in two to four weeks (the timeline of a typical payday), and the interest applied is averagely 400% across all States. While this looks predatory, there is ample regulation on rates applicable, and you should be only aware to choose reliable lenders.

Several financial experts don’t recommend payday loans, and sometimes they are indeed not the best choice, while several other routes can be walked. However, such loans can be a viable solution if a careful and informed approach is taken.

Some quick facts

The most remarkable statistic we found is that around 12 million Americans take payday loans each year, as of 2021.

There isn’t a strong prevalence in a certain age group, but a hefty 37% are young adults (college students) with low income and obviously a poor credit history, if any, while the remainder is almost evenly distributed among the other ages.

A whopping 80% of payday loans are taken out within 2 weeks of paying off a previous loan of the same type.

75% of payday loans users are re-borrowers, and the average frequency is estimated to be 6 times per year.

The APRs range widely between 175 to 525%, with Nevada and Texas seeing rates beyond 650% and up to 780% from some lenders.

The common purposes for embarking on a payday loan are: utility bills, car installments, rents, emergencies, and (even) groceries shopping.

How do payday loans work?

Whether you seek fast cash for an emergency or to keep pace with your everyday expenses, payday loans are a greatly efficient process to get it: by submitting little basic information such as an ID, your bank account, and monthly income you will likely receive the money within the same day if you obtain approval, which is also almost instantly. In case you are self-employed, you will declare a predicted income. Usually, a physical provider is quicker than online lenders but comes with lesser guarantees.

As for repayments, you will need to provide a post-dated check for the full balance including the applied fee; alternatively, you could authorize the lender to withdraw directly from your bank account or, in some cases, using your prepaid/debit card.

The borrowed amount is repaid in a unique installment along with the applied interest rate: on the contrary, multiple payments are nearly always not allowed. The type of interest is fixed, so it stays the same during the whole term of the loan, also if you go beyond the due date.

Payday loans are unsecured, meaning that you won’t have to put any collateral asset at disposal of lenders. In some cases, wages themselves can act as collateral, though. However, lenders are likely to require access to your bank account to withdraw money in case you can’t repay the lump-sum installment of the loan.

A common issue to obtain a loan is not having a too low credit score, or none at all: payday loans don’t require a credit check from lending companies.

Generally, what suffices to get a payday loan is enough income to afford the repayments, however, there is always the chance that you can be denied the loan. Commonly, here is why it might happen:

-Your income is too low: there is no general minimum, but it will depend on the lender

-Long previous period of unemployment

-Too recently opened bank account

-Recent bankruptcy

-Serving ( you can’t be charged with APRs above 36%).

How much you’ll be able to borrow is, just like conventional personal loans, based on your financial standing, including essentially your income and employment status. Each lender gives a slightly different weight to the factors involved to determine your loan amount. Also, the State in which you live sets different caps from other states. The amounts asked for payday loans are usually around $300- $500.

In most circumstances, it is possible to take a new loan in which is rolled the old one, whereas the repayments are hard to sustain in the short frame, but this comes with the build-of interest, making the loan more troublesome: the risk is obviously putting oneself into a debt-spiral.

A significant edge of a payday loan is that it doesn’t report to credit bureaus, with the consequence that it won’t hurt your credit score. On the other side of the coin, neither you won’t be able to build it, which would be an important move to make you access to personal loans in the future, being these definitely more affordable and safe.

The Federal Trade Commission is the body that regulates payday loans, protecting borrowers from scams, abusive and fraudulent companies. Its general recommendations are to avoid payday loans if possible, or still to limit the amount to borrow, so as to keep up with the payments, and made it until the next payday.

How much does a payday loan cost?

As mentioned, paydays loans have steep interest rates, thus they are always expensive, much more than those offered from personal loans and credit cards. Given a $500 loan as an example, 360% APR would equal a repayment of $650, to be given in a lump sum and within 2-4 weeks, depending on the lender of choice. We found that there is usually a $15 fee for every $100 borrowed, but in general, the fee can range from $10 to $30. Mind that the lenders will use either the APR or the fee when they disclose the cost of your loan: for the sake of simplicity, a $15 fee on a $100 loan equals a 115%APR; it becomes $30 on a $200 loan, and the related APR will be 230%, and so on.

From some lenders and in some States, also depending on the loan amount and your income, you can see APRs exceeding 600%. However, they are by definition annual percentage rates, so if you want to know the rate applied to your unique installment, you must divide it by twelve, that is the number of months, within which the billing cycle ends.

While payday lenders may be exempted from the State’s set caps for APRs, (which must be disclosed), in other cases lenders deliberately surpass the limit rates in indiscriminate ways, that’s where you must be careful.

What happens if you can’t repay a payday loan?

As with personal loans, there might be a “grace period” beyond the payments due date, to an extent that will strictly depend on how flexible the lender can be. However, it will be very short, if any. Late and missed payments have consequences: the lender will have the right to withdraw from your bank account (although there is currently a limitation on how many attempts they can make), or you will incur fees.

But in case you can pay no more, the first approach should be talking to your lender, and explain your situation. Some lenders have a dedicated financial advisor in their team who should suggest you the best move. Not taking this step may put you in trouble: besides calling you for solicitation, they can address you to debt collectors or even open a lawsuit.

Payday loans are unsecured loans: you won’t risk losing your properties, but your bank account is still at risk, and the lending company has to find a way to recoup the money it gave you.

Are payday loans right for you?

Choosing a payday loan should be taken with awareness. You must accurately evaluate if it’s worth the necessity you are facing. To follow, we summarize the benefits and drawbacks.


  • Convenience of getting the money
  • Debt is extinguished same month with a unique installment
  • Lax requirements, such as no minimum credit score
  • Unsecured loans

The edge of payday loans is to satisfy the need for cash almost instantly. In the very short-term they are useful, helping to deal with an emergency or to keep up with the cash flow when you struggle to pay things like bills, rent, car installments, etc. The process of approval can take just 5 minutes, and disbursement can finalize the same day, in most cases in a matter of hours. Availability of such loans is wide, and online lenders can serve you 24/7.

Moreover, you’ll have to submit lesser documentation than with personal loans, which will save you time and the hassle in times of emergency, and when you just want to get that money fast. Since there is no need to meet a minimum credit score, the chance to qualify for a payday loan is quite high.

An overlooked aspect is that with a payday loan, you put end to your debt in a matter of 14-31 days, and making a unique repayment (assuming you can actually afford it). In contrast, personal loans require that you return the borrowed money in multiple installments, which are spread generally from a minimum of 6 months up to 5 years and more. The recurrence of payments may be overwhelming in the long run, though you obtain larger sums.

Not least, you won’t risk your assets if you become unable to repay, which is more comfortable in comparison to other financial solutions, such as secured loans for bad credit, home equity loans, and lines of credit (HELOC).


  • Expensive because of very high APRs
  • Less safe than personal loans
  • Don’t build credit
  • Unsecured loans

The main drawback of payday loans is that they are costly, and it is easy for people who are yet in financial trouble to get trapped into debt build-up and perpetration. There are still several alternatives that should be assessed, and that we discuss later.

They don’t consider the borrower’s ability to repay: while the rates charged are partly determined on your income, you have still to consider all of your other expenses: what remains in your budget is crucial. Personal loans will take your credit score and DTI (debt-to-income ratio) into account to assure you are at least comfortable with repayments, but payday loans won’t do that.

Unscrupulous lenders may have hidden fees that are subtracted from your loan granted amount. This is avoided by choosing lenders that gained a solid reputation among customers, who can witness their transparency.

While there is no asset at risk with payday loans, a lender has still the right to take your money from your deposit accounts and to start any measure necessary to settle your debt. It is recommended that you have a very close look at whatever lender’s policy, so as to be prepared in case of hardship.

How do you get a payday loan?

As of 2021, these are the States where payday loans aren’t available: Arkansas, Arizona, Colorado, Connecticut, District of Columbia, Georgia, Maryland, Massachusetts, Montana, Nebraska, New Jersey, New York, Pennsylvania, North Carolina, South Dakota, Vermont, West Virginia. In other States, everyone has still their own regulations as for interest and further fees.

To apply for a payday loan, you will need the following:

-Being 18+ years old

-A valid SSN or ID

-A source of income

-An active bank account, and not too recent.

Online applications are straightforward and very fast to be finalized.

What are alternatives to payday loans?

According to financial experts and common sense, the very first alternatives to think of are the following:

  • Asking your employer an advance of your paycheck
  • Borrowing from parents and relatives
  • Turning to local communities and non-profits that provide financial assistance and advise

There is plenty of valuable solutions that can meet your need for fast cash almost as much well as payday loans if you can take your time to explore them. Provided that you actually have some credit score, you can try to qualify for:

  • Personal loans for bad credit. These have much lower APRs, usually below 36%, and terms are longer, typically 1-3 years, possibly up to 5; the installments are on a monthly basis.
  • Using a cosigner on a personal loan offer which you wouldn’t qualify for. The cosigner will be liable for paying your installments in case you couldn’t.
  • Credit cards. Several credit cards are relatively easy to get, and also quite affordable, with APRs roughly between 13% and 30%.

If you have a very poor credit score or none, you may want to consider:

  • Installment loans. Compared to payday loans, they have longer terms (at least 6 months), lower interest, and greater borrowable amounts.
  • Payday loan alternatives (PALs) from federal credit unions. Some credit unions can provide low-interest loans up to $1,000, with terms of 1-6 months. They also give financial counseling, but to take this loan you must be a member of the CU for at least one month.
  • Loans from Mission Asset Fund (MAF). If you can plan to attend some brief financial courses, you can obtain a 0% interest loan from this no-profit organization. It works exposing you to lending circles nationwide, and you can even build your credit score since it reports your activity to all the three major credit bureaus.

Charity associations might be also worth considering.

To avoid payday loans in the future, the wisest way is to save to build an emergency fund, which you will tap into whenever you are in trouble. A good idea might be to open a high-yield saving account, which is available from most of the major banks, such as CapitalOne, Chase, U.S. Bank, BBVA Bank, etc., or your own bank if you already have an open account.

Over the long haul, the main recommendation from experts is putting effort into improving the credit score, aka building credit: this can be basically achieved by settling any outstanding debt and making on-time payments. You want to fix the bad/no credit issue: for this purpose, you can try a tailored credit card such as the OpenSky Card, for instance.


Payday loans can be a lifesaver in some cases, life-destroyers in others. You are solely responsible for this choice, and taking the time to know and understand all the conditions for such loans is key. It is likely that payday loans will undergo further stricter regulation in the upcoming future.

In the while, if you are convinced to embark on a payday loan , you can see our choice of lenders, which demonstrated reliability and quality of service among lots of customers.


Consumer Financial Protection Bureau

Chamber of Commerce


Pew Research