What Is a Payday Loan?

A payday loan is a short-term loan for a small amount that comes at a high cost which is mean to be repaid with the borrower’s next paycheck. Payday loans require only an income and bank account and are often made to people who have bad or nonexistent credit.

How do payday loans work?

A payday lender will confirm your income and checking account information and send cash in minutes if you are at a store or as early as the same day if the transaction is done online.

The lender will ask you for a signed check or permission to withdraw money from your bank account electronically. The loan is due right after your next payday, which is typically two weeks up to one month.

The lender will make an appointment for you to return when the loan is due if the loan is issued at the store. If you do not show up, the lender will run the check or make the withdrawal for the loan plus interest. Online lenders will use an electronic withdrawal.

What is a direct payday loan?

Online payday loans may go through a direct payday lender, which makes its own decisions about loans, or a broker, who sells your loan to the highest bidder.

Choosing a lender that uses a broker is riskier because you don’t know who you’re giving your financial information to. Not only is there a greater risk of fraud and unwanted solicitation with a broker, but it can also increase the overall cost of the loan.

If you must take a payday loan, choose a direct lender.

How much can I borrow?

With a payday loan, the amount you can borrow varies according to your state’s laws and your finances. Most states allow amounts from $300 to $1,000.

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.

Does paying back 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.

What do I need to get a payday loan?

To qualify for a payday loan, you need an active bank account, ID, and proof of income. You will need to be at least 18 years old and have a Social Security number.

It is still possible that you will be rejected for a payday loan, despite having income and bank account.

You could be charged a late fee or a nonsufficient fund fee, depending on the state you live in. You might have a rollover option to extend the due date but that comes with a fee. If the lender is not able to collect the funds, your loan can be sent to a collection’s agency.

Alternatives to consider

• Use an interest-free cash advance app
• Get a personal loan from a credit union or online lender
• Ask if your bank offers a small-dollar loan
• Borrow money from a family member or friend
• Reach out to a community organization that provide free funds to cover essential expenses

Payday loan alternatives to avoid

• Long-term, high interest installment loans. These loans extend repayment terms to as long as five years.
• Auto title loans. These short-term loans require you to hand over the title to your vehicle as collateral. if you do not repay, the lender will seize your vehicle so make sure to pay on time if you get an auto title loan.