When a car repair, medical bill, or rent payment comes due before payday, a payday loan can look like a quick fix. The application is simple, approval is fast, and credit checks are often minimal. But payday loans are among the most expensive forms of credit available, and many borrowers end up taking out loan after loan to cover the last one. This guide explains how payday loans work, what they actually cost, how laws vary by state, and what alternatives can cover an emergency for far less.
What a payday loan is
A payday loan is a small, short-term loan, typically $500 or less, that is usually due in one lump sum on your next payday, often two to four weeks later. To borrow, you generally give the lender access to your bank account or a postdated check for the loan amount plus a fee. On the due date, the lender cashes the check or withdraws the money electronically.
Payday loans are offered by storefront lenders and online lenders. Requirements are usually limited to an ID, a bank account, and proof of income, which is why they appeal to people with poor credit or no credit.
What payday loans cost
Payday lenders typically charge a flat fee per $100 borrowed rather than an interest rate. According to the Consumer Financial Protection Bureau (CFPB), fees commonly range from $10 to $30 per $100 borrowed. A fee of $15 per $100 is common.
That may sound modest, but the cost is clearer as an annual percentage rate. A $15 fee per $100 on a two-week loan equals an APR of almost 400%. By comparison, credit card APRs often fall around 20% to 30%.
Example
You borrow $400 for two weeks at $15 per $100.
- Fee: $60
- Amount due in two weeks: $460
- Equivalent APR: about 391%
If you cannot repay and roll the loan over for another two weeks, you pay another $60 fee, and you still owe the original $400.
The rollover trap
Many borrowers cannot repay the full amount plus the fee by their next payday, since the loan takes a large share of a single paycheck. Lenders in many states allow borrowers to roll over or renew the loan by paying only the fee, or to repay and immediately reborrow.
CFPB research has found that most payday loans are taken out as part of sequences of repeated loans, and that a large share of borrowers end up paying more in fees than they originally borrowed. Each rollover adds a new fee without reducing the principal, turning a short-term loan into long-term debt.
Bank account risks
Because lenders can withdraw from your bank account, failed withdrawal attempts can trigger overdraft or nonsufficient funds fees from your bank. Federal rules limit how many times a lender can attempt a failed withdrawal before getting new authorization, but fees can still pile up.
How state laws differ
Payday lending is regulated mainly by states, and the rules vary widely:
- Some states effectively ban payday loans through interest rate caps, often 36% APR, that make traditional payday lending unprofitable.
- Some states allow payday loans with limits, such as maximum loan amounts, fee caps, limits on rollovers, cooling-off periods between loans, or extended repayment plans.
- Some states have few restrictions.
Online lenders must generally follow the laws of the state where the borrower lives, though some operate in ways that make enforcement difficult. Check your state attorney general’s or financial regulator’s website to confirm a lender is licensed.
Protections for military members
The Military Lending Act caps the cost of most consumer credit, including payday loans, at a 36% military annual percentage rate for active-duty service members and their dependents.
Safer alternatives to payday loans
Payday alternative loans from credit unions
Federal credit unions can offer payday alternative loans (PALs) under National Credit Union Administration rules. These loans:
- Range from $200 to $2,000, depending on the program
- Carry APRs capped at 28%
- Have terms from one to 12 months
- Limit application fees to $20
You usually need to be a credit union member, sometimes for at least a month.
Small-dollar loans from banks
Some large banks offer small-dollar installment loans to existing checking customers, with fees far below typical payday loans and repayment over a few months.
Paycheck advances from employers
Some employers offer earned wage access, which lets you receive part of your earned pay before payday, sometimes for a small fee. Compare fees and any subscription costs.
Payment plans with creditors
Hospitals, utilities, landlords, and other billers often offer payment plans or hardship programs. Ask before borrowing. Many hospitals have financial assistance policies for patients with limited income.
Credit card cash advance
A cash advance is expensive, with fees and a high APR, but it is usually far cheaper than a payday loan rolled over several times.
Local assistance
Community action agencies, charities, religious organizations, and 211 referral services can help with rent, utilities, food, or emergency costs.
Personal loans
Online lenders, banks, and credit unions offer personal installment loans with fixed payments. Even loans for borrowers with fair credit are typically far cheaper than payday loans, though rates vary.
If you already have a payday loan
- Ask about an extended payment plan. Many states require lenders to offer one, letting you repay over several installments without new fees.
- Avoid rolling over. Each rollover adds a fee without reducing the debt.
- Look for a cheaper loan to pay it off, such as a credit union PAL.
- Contact a nonprofit credit counselor for help with a budget or debt management plan.
- Know your rights. If a lender harasses you, threatens arrest, or makes unauthorized withdrawals, you can file a complaint with the CFPB and your state regulator. Debt collectors are also subject to the Fair Debt Collection Practices Act.
- Revoke account access if needed. You can revoke authorization for electronic withdrawals by notifying the lender and your bank, though you still owe the debt.
Building a buffer for next time
The best protection against payday loans is a small emergency savings cushion. Even a few hundred dollars set aside can cover many unexpected expenses. Automatic transfers of a small amount from each paycheck into a separate savings account can build that buffer over time. Building credit through on-time payments can also open access to cheaper borrowing options when you need them.
Payday loans vs. other short-term credit
| Option | Typical cost | Repayment | Credit check |
|---|---|---|---|
| Payday loan | About $15 per $100, near 400% APR | Lump sum in 2 to 4 weeks | Often minimal |
| Credit union PAL | APR capped at 28% | 1 to 12 months | Usually |
| Credit card cash advance | Fee plus high APR | Revolving | Already approved |
| Personal loan | Varies by credit | Fixed monthly payments | Yes |
Related reading: Credit Utilization Ratio: How Card Balances Move Your Score and How to Manage Them.
Frequently Asked Questions
How much does a payday loan cost?
Fees typically range from $10 to $30 per $100 borrowed. A common $15 fee per $100 on a two-week loan equals an APR of almost 400%.
Are payday loans legal in every state?
No. Some states effectively prohibit them through interest rate caps, while others allow them with limits on amounts, fees, and rollovers.
Can a payday loan hurt my credit?
Payday lenders usually do not report on-time payments to the major credit bureaus, but unpaid loans sent to collections can be reported and damage your credit.
What is a payday alternative loan?
A payday alternative loan is a small loan from a federal credit union with an APR capped at 28%, amounts from $200 to $2,000, and terms of one to 12 months.
What happens if I cannot repay a payday loan?
The lender may attempt withdrawals from your bank account, charge fees, offer a rollover, or send the debt to collections. Ask about an extended payment plan, which many states require lenders to offer.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
