What Is a Payday Loan?
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A payday loan is a high-cost, short-term loan for a small amount — typically $500 or less — that’s meant to be repaid with the borrower's next paycheck. Payday loans require only proof of identification, income and a bank account and are often made to people who have bad or nonexistent credit.
Financial experts caution against payday loans — particularly if there’s any chance the borrower can't repay the loan immediately — and recommend alternative lending sources instead.
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How do payday loans work?
A payday lender will confirm your income and checking account information and deliver cash then and there at a store or, if the transaction is done online, as early as 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, typically in two weeks, but sometimes in one month.
If the loan is issued at a store, you may return before or on the day the loan is due to repay. If you don’t show up, the lender will run the check or make the withdrawal for the loan amount plus interest. Online lenders use an electronic withdrawal.
» MORE: Payday vs. installment loans
An installment loan may be a more affordable way to borrow money. These loans let you borrow the money all at once, then pay it back in fixed monthly payments over a period of months or years, instead of weeks. You won’t need to put up collateral, and loan amounts tend to be higher, while interest rates are usually lower. Lenders typically require a credit check to apply, but you can find installment loans for bad credit.
How much can you get from a payday loan?
The amount you can borrow varies according to your state’s laws and your finances, but a payday loan is typically $500 or less.
This doesn’t mean you’ll 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 evaluate your ability to repay, or your other obligations, leaving you at risk for financially overextending yourself.
How much do payday loans cost?
The cost of a loan from a payday lender is typically $10 to $30 for every $100 borrowed, according to the Consumer Financial Protection Bureau. If a payday lender charges $15 for a $100 two-week loan, that’s a 391% APR.
If the loan isn’t repaid in full on the first payday, a fee is typically added and the cycle repeats. Within a few months, borrowers can end up owing more in interest than the original loan amount.
That’s why payday loans are risky — it's easy to get trapped in a cycle of debt and expensive to get out.
Do payday loans build credit?
Paying back a payday loan doesn't usually build credit. Most payday lenders don’t report on-time payments to credit bureaus, so the loan can't help your credit score.
If you don’t pay the loan back, however, your credit can be damaged. The payday lender may report the default to the credit bureaus or sell the debt to a collections agency that will do so, which will hurt your score.
at Self
» MORE: How to build credit
What do I need for a payday loan?
To qualify for a payday loan you typically need an active bank account, a government-issued ID 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 still can be rejected for a payday loan, despite having income and a bank account. Lenders that charge APRs over 36% aren’t legally allowed to lend to active-duty military, their spouses and their dependents, for example.
What happens if I can't repay a payday loan?
Depending on the lender and the state you live in, the payday lender could charge a late fee or returned payment fee. Your bank or credit union may also charge a non-sufficient funds fee.
You may have a rollover option to extend the due date, but that usually comes with a fee.
If a lender is unable to collect the funds, your loan can be sent to a collections agency.
Payday loan alternatives to consider
Use an interest-free cash advance app. Mobile apps like Earnin, Dave and Brigit can offer interest-free or low-fee advances on your paycheck, though there are eligibility requirements and caps on how much you can borrow.
» COMPARE: Cash advance apps that cover you 'til payday
Get a personal loan from a credit union or online lender. A personal loan will likely carry a lower APR than a payday loan, so it’s more affordable. Credit unions tend to offer the lowest rates for bad-credit applicants, and many offer payday alternative loans, specifically, but you’ll need to become a member before applying. Online lenders also serve bad-credit borrowers and can fund loans the next business day, but rates may be higher.
» COMPARE: See your bad-credit loan options
Ask if your bank offers a small-dollar loan. Mainstream banks are beginning to offer small-dollar loans that can cover emergency expenses. U.S. Bank’s Simple Loan, Bank of America’s Balance Assist Loan, Wells Fargo’s Flex Loan and Truist’s Ready Now Loan all provide short-term funds for existing customers in good standing.
Borrow money from a family member or friend. A loved one may be able to spot you the funds. This will save you money on interest, and you won’t have to undergo a credit check. Just make sure you agree to the terms of the loan, such as when you’ll pay it back.
Reach out to a community organization. There are local and regional organizations that provide free funds to cover essential expenses. Check NerdWallet’s database of local alternatives to payday loans to see what’s available in your state.
Use a BNPL app to cover a necessary purchase. “Buy now, pay later” apps like Affirm, Afterpay and Klarna can split up your online or in-store purchase into equal installments, often for zero interest and no fees if you pay on time. These apps may be a smart solution for covering an essential expense, like a mattress or toiletries.
You could also consider a credit card cash advance or a pawnshop loan. Though these options should offer lower interest rates than a payday loan, they are still costly.
Once your immediate cash emergency passes, start building an emergency fund. If you can save even a few hundred dollars over time, then you’re repaying yourself rather than the lender when emergencies arise.
» COMPARE: Explore alternatives to payday loans
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