Payday Loan

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What is a payday loan?

A payday loan is a short-term, high-cost loan typically sized around the borrower’s next paycheck. These small-dollar loans are meant to be repaid quickly—often within two to four weeks—and are commonly used by people facing immediate cash needs. Because of steep fees and short repayment schedules, payday loans can be very expensive and carry a high risk of trapping borrowers in repeated debt.

How payday loans work

  • Loan size and term: Usually small amounts (often under $500) with terms of a few weeks until the borrower’s next payday or other regular income (e.g., Social Security).
  • Repayment method: Borrowers typically authorize the lender to withdraw the full amount from their bank account on the due date or provide a postdated check.
  • Credit checks and collateral: Lenders generally do not run credit checks and the loans are unsecured (no collateral required).
  • Rollovers: In some states, unpaid loans can be rolled over into new loans, increasing total cost and debt burden.

Typical costs and how they’re expressed

  • Fees rather than APR: Many lenders charge a flat fee per $100 borrowed (commonly $10–$30 per $100) rather than quoting a traditional interest rate.
  • High APRs: When converted to an annual percentage rate (APR), short-term fees can equal APRs in the hundreds of percent. For example, a $15 fee on a two‑week $100 loan is roughly a 390% APR.
  • State variation: Laws vary by state—some cap fees, others ban payday lending, and a number exempt payday lenders from typical usury limits.

How to obtain a payday loan

  1. Find a lender (online or storefront).
  2. Provide ID, proof of income, and a bank account number or postdated check.
  3. Review terms carefully (amount due, fee, repayment date).
  4. Authorize repayment via bank draft or check.

Note: Some payday alternative loans (PALs) are offered by federal credit unions. These typically have lower amounts ($200–$1,000) and longer terms (one to six months).

Major risks and legal considerations

  • Debt cycle: Short terms and high fees can force borrowers to take repeat loans, compounding costs.
  • Bank-account withdrawals: Granting automatic access to your account can result in repeated withdrawal attempts and overdraft fees. The Consumer Financial Protection Bureau (CFPB) has highlighted cases where lenders made multiple attempts (for example, up to 11 attempts in one day) and limits certain attempts under federal rulemaking.
  • Credit reporting: Payday lenders often do not report timely repayments to credit bureaus, so on-time payments may not boost credit. Defaulted loans sent to collections can harm credit scores.
  • Bankruptcy: Payday loans can generally be discharged in bankruptcy, but taking a loan shortly before filing may lead to creditor claims of fraud.
  • State law differences: Some states restrict or prohibit payday lending; others allow it with caps on loan size and fees.

Alternatives to payday loans

  • Personal loans from banks, credit unions, or online lenders (often lower APRs and longer terms).
  • Payday alternative loans (PALs) at federal credit unions.
  • Emergency assistance from community organizations, employer paycheck advances, or local social services.
  • Short-term installment loans with more transparent terms and longer repayment periods.

FAQs

Bottom line

Payday loans provide fast cash but at a very high cost and with significant risk of escalating debt. They are best avoided unless there truly are no safer options. Before taking one, compare alternatives such as small personal loans, credit-union PALs, or community resources that offer lower rates and longer repayment terms. If you do use a payday loan, read the terms carefully and understand the total fees and repayment requirements.