- Payday loans are small, expensive loans you repay all at once, typically on your next payday.
- Payday loans often lead to a cycle of debt, so they should be considered only after you've exhausted all other options.
- There are usually no credit benefits to payday loans, but defaulting can negatively impact your credit score.
What is a payday loan?
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 are available at storefront locations and from online lenders. They only require proof of identification, income and a bank account.
Since lenders don’t check loan applicants’ credit, payday loans are often made to people who have low or nonexistent credit scores.
» Jump to: Payday loan alternatives
How do payday loans work?
You can apply for a payday loan in person or online. After applying, the lender will confirm your income and checking account information. If approved, you’ll often get the money the same day.
At a payday loan store, you can receive money in cash. For online transactions, the lender will send funds electronically to a debit card or your bank account.
When you get a payday loan, the lender will ask for a signed, post-dated personal check or permission to electronically withdraw money from your bank account on the due date. The loan is often due on your next payday, usually in two weeks, but sometimes in one month.
You could pay off the loan prior to its due date. If you don’t, the lender will repay itself by depositing the signed check you provided or withdrawing repayment from your bank account.
How much do payday loans cost?
Payday loans typically cost $10 to $30 for every $100 borrowed, according to the Consumer Financial Protection Bureau.
If you don’t have the money to repay the loan in full on the due date, the lender may be able to extend the due date — but you’ll be charged a fee. If this cycle repeats, 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.
Payday loans and interest rates: An example
Payday and other high-cost lenders prefer to explain the cost of borrowing in terms of fees rather than interest rates. For example, if you borrow $100, and the fee is $15 for every $100 borrowed, your total repayment will be $115.
However, payday lenders, like all lenders, must disclose the annual percentage rate the fee equates to before the borrower signs a loan agreement. A $100 payday loan with a $15 fee due in two weeks equates to an APR of 391%.
The APR is the best apples-to-apples cost comparison tool for loans and credit cards. For example, if a credit card has a 15% APR, a personal loan has a 25% APR and a payday loan has a 350% APR, then the credit card is the least expensive option and the payday loan is the most expensive.
What happens if you 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 nonsufficient funds fee or an overdraft fee if repaying a payday loan causes you to overdraw your account.
Your credit score could drop if the account goes into collections. Another consequence of defaulting on a payday loan is that the lender may sue you and potentially have your wages garnished.
Did you know...
How to get a payday loan
Compare alternatives: Because payday loans can cause financial damage, consider alternative options first. (See a list of options below.) You could also try to delay your reason for borrowing. For instance, if you were going to use the money to cover rent or other bills, ask your landlord for an extension or see if you can set up a payment plan for utility bills.
Check payday lender reviews: Before you get a payday loan, see what other borrowers have said about the lender. Search the CFPB’s complaint database, the Better Business Bureau and forums like Reddit where users may share their experiences. If you’re borrowing from a local storefront lender, Google reviews may provide some insights.
Gather the necessary documents: 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. Have these documents together when you plan to apply.
Look for the disclosures: Though payday loan rules vary by state, you should have access to some information before you borrow no matter where you live. This includes the lender’s license to do business in your state; the amount you’re expected to repay and when; the payday loan fee amount; and what APR it equates to. If a lender isn’t willing to provide any of this information, consider it a red flag.
Make a plan to repay the loan: The key to avoiding a payday loan debt trap is to determine how you’ll repay the loan in full on or before the due date plus meet your other financial obligations. This will help you avoid having to borrow again or take on additional fees to extend the loan.
How do payday loans affect 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.
Are payday loans legal?
Each state makes its own payday loan regulations, usually by setting limits on the APR lenders can charge based on the loan’s size and repayment term. Many states have enacted tight restrictions on the cost of consumer loans in the past few years, effectively outlawing payday loans, but they’re not illegal everywhere.
According to a 2022 analysis by the Pew Charitable Trusts, payday loans are either banned or so heavily regulated that loan providers don’t operate in the District of Columbia and these 18 states: Arizona, Arkansas, Connecticut, Georgia, Illinois, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Dakota, Vermont and West Virginia.
Payday loans and the Military Lending Act
The Military Lending Act (MLA) prevents lenders from providing loans with APRs above 36% to active-duty military members, their spouses or certain dependents.
Because of the MLA, payday and other high-cost lenders frequently don’t allow members of the military to apply for a loan.
Payday loan alternatives to consider
Use an interest-free cash advance app. Mobile apps like Earnin, Dave and Brigit can offer no-fee advances on your paycheck, though 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 installment 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 applicants with bad credit compared to other lenders.
Many credit unions also offer payday alternative loans. However, you’ll need to become a credit union member if you aren’t already.
Online lenders also serve borrowers with bad credit, but rates may be higher than credit unions.
» COMPARE: See your bad-credit loan options
Use a credit card: Interest on a credit card charge will likely be lower than payday loan costs. You may also be able to get a credit card cash advance. It will come with higher interest rates than a regular credit card purchase but still may be less expensive than payday loans.
Ask if your bank offers a small-dollar loan. Some traditional banks offer small-dollar loans that can cover emergency expenses. U.S. Bank’s Simple Loan, Bank of America’s Balance Assist Loan and Wells Fargo’s Flex Loan all provide short-term funds for eligible customers.
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 family loan, such as when you’ll pay it back.
Reach out to a community organization. If you need to cover an emergency expense, like a car repair or medical bill, a nonprofit organization may be able to help. This quick-help tool from NerdWallet can guide you to the appropriate resources.
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 refrigerator.
Pawn an item of value: If you have jewelry, electronics, an instrument or another item of value, you could consider a pawnshop loan. APRs can reach around 200%, but it would be less expensive than a payday loan with a 400% APR. You also won’t risk damage to your credit, though you could lose the item you pledged as collateral if you don’t repay the loan.
» COMPARE: Explore alternatives to payday loans
Is a payday loan secured or unsecured?
Do payday loans have fixed or variable interest rates?
Is a payday loan an installment loan or revolving credit?
Article sources
- 1.Consumer Financial Protection Bureau. What is a payday loan?. Accessed Mar 5, 2026.
- 2.Consumer Financial Protection Bureau. Market Snapshot: Consumer use of State payday loan extended payment plans. Accessed Mar 4, 2026.
- 3.The Pew Charitable Trusts. Payday Loans Cost 4 Times More in States With Few Consumer Protections. Accessed Mar 5, 2026.
- 4.Federal Reserve. Military Lending Act. Accessed Mar 5, 2026.
