Payday loans -- also known as cash advance loans, check advance loans, credit access business, deferred deposit loans, deferred presentment, or postdated check loans -- provide immediate cash in dire circumstances.
A payday loan is a short-term loan with small amounts (usually ranging from $100 to $500) that is meant to be repaid on your next payday. Loan terms generally tend to run anywhere from 2 to 4 weeks, although this depends on your lender.
How To Qualify For A Payday Loan
In order to qualify for a payday loan, you must meet the following criteria:
- Be at least 18 years of age
- Have an active and valid bank account
- Have a valid ID
- Show proof of income (such as a pay stub)
Payday loans are available for borrowers with bad credit. However, you can be rejected for several reasons:
- You don't make enough money.
- You haven't been employed long enough.
- Your bank account has been opened too recently.
- You have a recent bankruptcy.
- You have recently bounced checks.
- You already have an outstanding loan.
- You don't meet your lender's repayment requirements.
- You are an active-duty servicemember in the military. This is due to Federal law preventing payday lenders from lending short-term loans with an APR over 36% to military.
How A Payday Loan Works
Once you apply for a payday loan (whether in-person or online), your lender will verify your financial information. If you are approved, you can receive your funds in a matter of minutes (if you applied in-store) or the next business day through an electronic transfer (if you applied online).
The amount you can borrow depends on your finances (income and expenses) and your state's laws. Most states cap loan amounts between $300 and $1,000.
If you receive your loan in-store, you will make an appointment with your lender to come in and repay the loan on its due date. You may have to write a postdated check for the full amount plus fees (for in-store loans) or allow the lender to electronically debit the funds from your bank account (for online loans).
If you don't repay your loan, the lender will either cash the check or authorize an electronic withdrawal.
The Cost Of A Payday Loan
According to The Pew Charitable Trusts, around 12 million Americans take out payday loans each year, which results in around $9 billion in loan fees.
Payday loans can be incredibly helpful when you need cash quickly, but they can come at a high cost: specifically, high fees and interest rates which can quickly land you in debt if you fail to repay your loan.
Payday lenders may charge $10 to $30 for every $100 borrowed, meaning a $200 loan can cost you up to $260; but if you fail to pay on time, you can end up paying more in interest than the original loan amount. Just a note: Most states that allow payday loans will set a cap on loan amounts and fees.
Some fees may include:
- Nonsufficient funds charge
- Late fees
- Rollover fees
- Return-payment fees
And it's even more costly if you don't repay your loan in full and on time: you may have to roll the debt over or re-borrow. Additionally, lenders will continue withdrawing funds from your account, which can result in overdraft fees from your bank account. Eventually, they may try to negotiate a settlement, contact you (or your references) to collect the full amount, or enlist a debt collector who may file a civil lawsuit. If you lose the lawsuit, the judgment against you can lead to wage garnishment or the loss of your assets.
How A Payday Loan Helps
It may seem risky to take out a payday loan, but in a tight financial situation, they can be incredibly helpful:
- Payday loans can save you from racking up credit card debt and minimum payments by providing you with upfront cash when you need it.
- Payday loans can save you from dealing with overdraft fees on your checking account in case you don't have enough funds available.
- While most types of loan applications generate a hard inquiry (which can damage your credit score), many payday lenders use a different method of evaluating you.
Alternatives To Payday Loans
Because payday loans can be risky if not used responsibly, it should only be used as a last resort -- especially if you know you can't repay the loan immediately.
Below, we list some payday loan alternatives that you can use if you're in need of quick cash:
- Personal loan: Consider taking out a personal loan. Whether you have good or bad credit, you can usually find a loan with reasonable interest rates and terms.
- Credit union loan: Members of local credit unions may be able to take out small-amount, low-interest personal loans or even a PAL (payday alternative loan) with amounts between $200 and $1,000. These generally have much lower interest rates than a payday loan.
- Paycheck advance: Ask your employer if you can get an advance on your paycheck.
- Use your savings: Dig into your emergency savings if you have one. If not, start building a fund to help you avoid emergencies in the future.
Our Top Picks
We recommend using a secure, short-term loan marketplace like MoneyMutual, which can provide same-day funding for borrowers with all credit types.
Frequently Asked Questions
What is a payday loan?
A payday loan is a type of high-interest, short-term loan that provides funds immediately and are usually repaid on your next payday.
Can repaying a payday loan on time build credit?
Generally, no. Most payday lenders don't report on-time payments to the credit bureaus. However, if you don't pay your loan back, your credit can be damaged.
Do payday lenders run credit checks?
Payday lenders usually run some form of credit verification or check your ability to repay, but many do not run a credit check.
