Payday loans seem like a fast, easy solution to sudden or unexpected financial emergencies.
That’s why 12 million Americans take out at least one payday loan every year to help cover their bills between paychecks.
On the surface, these loans seem like a great way of getting through financial hardship. But with astronomical interest rates and lender fees, payday loans can quickly become a major problem. Here’s what you need to know about payday loans, and a few payday lenders to avoid.
What is a Payday Loan?
Payday loans exist under many names, including:
- Cash advance
- Short-term loan
- Bad-credit loan
- Fast-cash loan
- Paycheck advance
Whatever the name, these short-term loans all operate under a similar set of rules and regulations. Most loans range from $100 to $1,000 and must be repaid in a lump sum that includes the principal balance plus interest and any lending fees.
Borrowers are usually given two weeks, or until their next paycheck, to pay back the loan in full. However, some lenders now allow borrowers to pay back the loan in installments over a few months.
According to the Consumer Finance Protection Bureau (CFPB), payday lenders require borrowers to grant them access to the borrower’s bank or credit union account when applying for a cash advance. This is so the lender can transfer the funds into the account and, when the time comes, withdraw the amount they’re owed.
If the borrower doesn’t have a bank account, the lender may instead accept a postdated check or prepaid card account.
Usually, the borrower receives the requested amount of money immediately or within one or two business days. When the loan is due, the lender can make an automatic withdrawal for the total amount they’re owed, including the principal balance, any interest, and related charges.
Unfortunately, due to the nature of payday loans and their high interest rates, many borrowers can’t pay off the loan when the time comes. This leads to a common problem known as the payday loan trap.
For more information on how payday loans work and their potential dangers, check out this CFPB video.
How Do You Get a Payday Loan?
Getting a payday loan is easy because there are only a few requirements. It’s possible to get a payday loan online or at a storefront location. To qualify, you’ll need:
- A steady source of income
- Valid identification (driver’s license, birth certificate, social security card, passport, etc.)
- An active bank or credit union account (or a prepaid card account)
- To be 18 or 21 years old, depending on the state
The application is usually fast and easy. To apply, the borrower usually only needs to fill out their basic contact information, provide their income and banking information, and sign the form. They may also need to provide supporting documents like their ID or recent pay stubs.
When applying online, the application process is similar but even quicker. Online lenders sometimes offer pre-approval as well, which lets the consumer see whether they’re approved and for how much.
Since most lenders don’t check the borrower’s credit score or other factors like their debt-to-income ratio, they can offer near-instant approval for the loan.
Although rare, it is possible to be denied a payday loan. This usually happens when the individual:
- Can’t prove their income or lacks stable employment.
- Doesn’t meet the age requirements.
- Doesn’t have a checking account or another way to receive the funds.
Payday laws are illegal in several states, but that doesn’t seem to be much of a deterrent for payday lenders. They’re still available virtually everywhere.
What is the Payday Loan Debt Trap?
Although payday loans may seem like a convenient financial solution, they’re actually a debt trap for many borrowers because of their high interest rates, fees, and short repayment time.
Payday loans are almost always due in full on the borrower’s next payday. But by the time the borrower gets their paycheck, they’re usually unable to make the payment because they have other bills. This means they have to take out a second loan to pay off the first.
The second loan covers the first, often with increased fees. If the borrower can’t pay this new amount back, then they must take out a third loan to help cover what they owe.
The cycle continues because each new loan ends up rolling over into the next. The borrower may be able to pay off some of the lending fees, but never the full balance. And, since payday loans come with such high interest rates, this cycle can continue for months or years.
In 2021, the average two-week payday loan was $375. However, payday loans vary in interest from around 300% to nearly 800%. This, combined with the lender’s fee, late fees, and other charges, can easily turn a small cash advance into a major financial burden.
For example, say you need to take out a cash advance to pay bills or get groceries before your next paycheck. So, you decide to get a payday loan for $400 to be paid back in two weeks.
The lender grants your request, but they charge a 15% finance charge (fee) of $60. This makes the $400 loan $460.
If you can’t pay on time, then you must take out a second short-term loan to cover the first. This second loan adds another 15% finance charge of $69. This means you now owe $529 ($460 plus $69) on a $400 starting loan.
The longer this cycle of borrowing and reborrowing repeats, the harder it is to pay it back.
This repeat borrowing is the payday loan debt trap. It’s a vicious cycle that happens because most people don’t fully understand how payday loans work or how much they truly cost.
This video from PBS NewsHour shows how borrowers can get stuck in a cycle of debt.https://www.youtube.com/watch?v=bBvjkCrqKuwPBS
Payday Loan vs. Personal Loan
Just like a payday loan, a personal loan is a quick, relatively easy way to borrow some cash. People take out personal loans for many reasons, including:
- Debt consolidation
- Financial emergency
- Monthly bills like rent or utilities
- Unexpected medical expenses
Though they’re similar, personal loans differ from payday and other short-term loans in several ways.
Loan terms: A payday loan typically has a two-week repayment term, with some exceptions. Personal loans, on the other hand, can be repaid in 12+ months.
Maximum loan amount: Personal loans range from a few thousand dollars to up to $100,000. Payday loans, meanwhile, are typically between $100 and $1,000 (with a few lenders offering payday loans up to $1,500).
Interest rates: Borrowers with a credit score above 760 can expect to pay around 10.45% APR on a personal loan, while those with a poor credit score may not be approved at all. Personal loans cap out at around 36% interest. This differs from payday loans, which often range from around 350% to nearly 800% APR.
Eligibility requirements: While payday loans require little more than a bank account, some ID, and a verifiable source of income, personal loans have stricter requirements. Unlike payday lenders, personal loan lenders take the borrower’s credit score, income, and other factors into consideration when determining their eligibility. Also, a higher credit score means a lower interest rate and better loan terms with a personal loan.
Application time: Since payday loans are designed specifically to provide cash now, borrowers may receive their money in as few as 15 minutes. Personal loans are also quick, especially when the application is done online. However, these loans usually take one or two business days to complete.
Most Popular Storefront Payday Lenders (by search volume)
Storefront payday lenders typically operate out of small stores and offer on-site applications and approval. Many of these lenders also use an online application.
Headquartered in Spartanburg, S.C., Advance America is a highly popular storefront lender that specializes in payday loans, title loans, and installment loans. It has 219,000 searches per month.
- Operates in over 25 states with 2,000+ storefront locations across the U.S.
- Legitimate company established in 1977.
- Superior customer service with quick response times.
- Easy online and in-person application.
- Many consumers receive funds the same day.
- Provides useful resources online, including a repayment estimator which allows the borrower to calculate the interest on the life of their loan and make a payment plan before they borrow.
- Automatic withdrawal from the borrower’s checking account when the loan is due.
- Borrower must be a resident of the state they’re requesting funds in.
- Interest rates are high and vary by state (in Alabama, for example, the APR is 456.25%).
- Some reviews mention the company is a scam, but these are from competitors and inaccurate.
Founded in 1997, Speedy Cash is a privately held lender offering short-term payday and installment loans. The company has 98,000 searches per month.
- Multiple ways to apply, including in-person and on-site.
- May obtain funds on the same business day.
- No penalty for early payment.
- Borrowers can receive funds via direct deposit, prepaid debit card, or in person.
- Straightforward application.
- Lender offers payday loans up to $500, depending on the state, as well as larger installment loans.
- Certain states charge an origination fee, which is an upfront charge for processing a loan.
- Not available in all states.
- Sky-high interest rates.
- Loan terms vary by state.
- Not BBB-Accredited, though it has an A+ rating by customers on BBB.org.
- Over 300 customer complaints in the past three years, mostly related to billing, loan collection, and predatory lending practices.
- Was part of a class-action lawsuit in California for allegedly withdrawing hundreds of thousands of dollars from 1,000+ borrowers.
Check Into Cash Inc.
Based in Tennessee, Check Into Cash was founded in the year 1993. It has 57,000 searches per month.
- BBB Accredited since 2000 with an overall positive customer review score.
- Available in 20+ states.
- Offers short-term online and in-store loans, specifically payday and title loans.
- Loans vary from $50 to $1,000, depending on the state. First-time borrowers can borrow a maximum of $750 or their state’s upper limit.
- Loan activity, including repayment and missed payments, is reported to a credit bureau.
- Online educational resources for consumers.
- Fast online and in-person approval.
- Application requires a hard inquiry, which may impact the borrower’s credit score.
- High payday loan fees (APR ranges from 153% to 1,042%, depending on the loan amount and state).
- Short-term payment options only.
- Frequent miscommunications and loss of receipts.
- May have additional fees for lay payment or insufficient funds.
- Inability to pay may result in the account going to collections.
Ace Cash Express
With 43,000 searches a month, Ace Cash Express is the fourth most popular storefront lender on this list. The lender offers short-term payday loans to help underbanked consumers with small financial emergencies.
- Option to apply online or in person.
- Lender offers short-term loans.
- Borrower can decide to return the loan within 72 hours without penalty.
- Website isn’t user-friendly.
- Available in just 13 states.
- Interest rates vary, but consumers with poor credit can expect to pay more especially for installment loans.
- Lender doesn’t attempt to educate the consumer to help them with financial pitfalls or understand the risks of short-term loans.
- In 2014, the Consumer Financial Protection Bureau took action against Ace Cash Express for using illegal debt collection methods, luring borrowers into payday debt traps, and encouraging employees to carry out these practices.
Check ’n Go
Operating under CNG Financial Corporation, Check ‘n Go is a non-BBB-accredited lender with 42,000 nationwide searches a month.
- Easy online or in-person application.
- A bank account is not required if using a prepaid debit card.
- Multiple short-term loans are available, including payday loans, installment loans, and cash advances.
- Installment loans have a longer payoff term than payday loans.
- Good credit isn’t necessary.
- May receive funds within one or two business days.
- Loan terms and tactics may be deceptive and lead to an ongoing debt trap.
- Like other short-term lenders, Check ‘n Go is targeted at low-income, high-risk borrowers.
- Extremely high interest rates.
Most popular online payday lenders (by search volume)
It can be difficult to find a good, trustworthy online lender. If you’re looking for an online lender, here are a few ways to avoid a scam:
- The lender has an established online reputation with multiple verified reviews on sites like Trustpilot and the Better Business Bureau (BBB).
- Their website and online application are secured with HTTPS in the URL (not HTTP) and a lock icon in the address bar.
- They have a physical address, even if they only lend online.
- They’re a direct lender, rather than a third-party service.
Here are the top online payday lenders based on nationwide search volume.
OppLoans offers an alternative to payday loans up to $4,000. It has 77,000 searches per month.
- Fast approval and funding.
- No credit check.
- Reports to all three credit bureaus, which helps with credit building.
- No prepayment or origination fees.
- Offered in 36 states.
- Great customer service.
- Transparent loan terms and conditions.
- Refinancing options are available.
- Longer repayment options – up to 18 months – with the option of a hardship plan.
- High interest rates in the triple digits.
- Interest exceeds state maximums in certain states.
- Required $1,500 monthly gross income.
Rise Credit has generally neutral to positive reviews online regarding its application process and customer service. It has 27,000 searches per month.
- Fast, easy application with approval in a few minutes.
- Willing to work with no credit borrowers.
- No prepayment fees.
- 3000+ positive reviews on Trustpilot.
- Loan terms are set and can’t be renegotiated.
- High interest rates.
- Terms and conditions vary by state.
Based in Chicago, Net Credit has 16,000 searches per month. This lender offers short-term loans ranging from $1,000 to $10,000, depending on the state.
- Prequalification available.
- Secure online application.
- Consumers may apply for a line of credit up to $5,000, depending on the state.
- Offers other loans up to $15,000.
- Fast funding (within 1 business day).
- Long repayment periods (up to 5 years).
- High interest rates for a payday loan alternative (up to 36%).
- 10% cash advance fee.
- $10 late fee.
Established in 2017, Credit Ninja is a relatively new, fast-growing online lender with 14,000 searches per month.
- Fast, easy, and secure online application.
- Payday loans up to $5,000.
- Prequalification available.
- Lower interest rates than other short-term lenders.
- 3% lender’s fee.
- APR ranges from 4.95% to 35.99% online, but consumers have seen APR 200%+.
- Not BBB-Accredited.
Although Possible Finance offers payday-loan alternatives, its short-term financial solutions still come with a high level of interest and, as a result, risk. It has 10,000 searches per month.
- Ideal for borrowers with poor or no credit history.
- Payday loans range from $50 to $500 on average.
- Reports to all three credit bureaus.
- May allow delayed payment.
- Apply through their website or an app.
- No early loan payoff fees.
- APR is between 151% and 257%.
- Only available in WA, TX, UT, ID, OH, FL, and CA.
- Two-month repayment term. Website isn’t user-friendly or transparent with loan rates and fees.
- Origination fee up to $20 per $100 borrowed.
- Limited customer service.
CashNetUSA offers payday loans to consumers with low or bad credit. It also offers flexible lines of credit and installment loans in some states. It has 7,400 searches a month.
- Same-day deposit is possible.
- 17,000+ reviews on Trustpilot with an average rating of 4.7 stars.
- Online application with instant approval.
- 10-month to 28-month loan terms.
- Maximum loan amount $500.
- Loan terms and interest rates vary by state.
- Not available in all states.
- High origination fee on short-term loans (ex. $17.50 per $100 borrowed in Arkansas).
- 228% to 638% depending on the repayment period. Some claims of APR reaching over 1,100%.
- One payment extension is available but with additional fees.
A direct, licensed lender and alternative to payday loans, LendUp uses a secure online application to determine its customers’ potential eligibility for short-term loans. It has 6,200 searches per month.
- Funds are usually received within one to two business days.
- Does not threaten legal action for collection.
- Short-term loans up to $600 with a 6-month maximum repayment period.
- No credit score is required.
- No hard inquiry.
- Uses a points system (available in select states) to incentivize consumers to make on-time payments and take the company’s online financial education courses.
- High APR with an average of 400% for single-payment loans, which are the closest equivalent to payday loans.
- Limited availability.
- Checking account required.
Payday Loans Pros and Cons
Although they’re risky, deciding whether to get a payday loan is ultimately a personal choice. Before you make the leap, consider the pros and cons of payday loans.
- Payday loans are a convenient, accessible option for those who are strapped for cash and need financial relief fast. Many lenders are available 24/7, but even those that operate only on business days often offer same-day approval.
- These short-term loans have few requirements. In most cases, the consumer only needs to be 18+ years of age, have some form of government-issued ID (or a Social Security number), be able to prove their income, and have an open bank account.
- Consumers with poor or no credit can usually qualify for a short-term loan because most lenders don’t check their credit score.
- Payday loans are unsecured loans, meaning they don’t use collateral like secured loans.
- Many payday lenders use unfair or predatory lending tactics.
- Payday loans range from around 300% to 800% interest, with an average APR of 400%. In comparison, personal loans and lines of credit rarely exceed 36% interest.
- Since payday lenders rarely consider the consumer’s debt-to-income ratio, they may give the consumer money they can’t repay. This, combined with predatory lending practices, often leads to a vicious cycle of debt (aka the payday loan trap).
- Most cash advance lenders don’t report to the credit bureaus, so consumers can’t build credit with these loans.
- If a borrower defaults on the loan, it may be sent to collections and further hurt their credit.
- Many borrowers can’t pay for their loan on the due date, which results in overdrawn checking accounts, damaged credit scores, and additional fees.
- Payday lenders usually target minority or low-income communities. Not only that, but many borrowers end up trapped in a borrowing cycle that can last for months or years.
- If a borrower fails to make payments on their loan, the lender has the right to take them to court and sue them for the money they’re owed. This could mean legal fees, garnished wages, and other costly consequences.
- Payday loans vary based on state and can be difficult to understand. Lenders also aren’t always transparent about the terms of the loan.
- Only 14% of borrowers can pay off a $400 loan in 14 days, so they may need to borrow another loan to pay off the first.
Should You Get a Payday Loan?
A payday loan may be easy to get, but it’s tricky to get out of without a solid repayment plan.
Still, there are cases when a payday loan may feel like the only option. In 2018, 39% of Americans found it difficult to cover $400 of unexpected expenses due to a lack of funds or emergency savings. Individuals with no savings, insufficient income, or poor or no credit may view a short-term loan as a solution to their current predicament.
However, these loans are not well-regulated, and many people get caught up in a debt cycle due to interest and lender fees.
For the most part, you should only get a payday loan as a last resort. Even then, it’s important to make a solid plan to pay it back on time. Otherwise, consider other options instead.
What are Your Payday Loan Alternatives?
If you’re looking for an alternative to a cash advance or payday loan, check out these options.
Apply for a Bad-Credit Loan
If your credit score is holding you back from pursuing a better loan, apply for a bad-credit loan through a lender like LendingClub, Best Egg, or Upstart. A bad-credit loan is a fixed-rate, unsecured loan designed for borrowers with poor credit.
These lenders consider the consumer’s credit score, debt-to-income ratio, and overall credit report in the application. Most bad-credit loans range from 11.8% to 28.7% APR and can be repaid in installments over 1 to 5 years.
Consider a Credit Union Payday Alternative Loan
If you’re a credit union member, you can apply for a payday alternative loan (PAL). These short-term loans can be repaid in 1 to 12 months and have a maximum APR of 28%. This makes them more affordable – and more manageable – to most borrowers than a payday loan.
Sometimes called “social lending,” peer-to-peer lending is a way to eliminate the middleman (ex. bank or credit union). With this payday loan alternative, you borrow directly from another individual or website at fixed rates and terms. Popular options include Lending Club, Upstart, and Prosper.
Ask Friends and Family for Help
One of the biggest issues with payday loans is the astronomically high interest rate they come with. If you have friends or family who can help you, it may be worthwhile to ask them for financial assistance.
Consider creating a written agreement with them that specifies the terms and conditions of the borrowed money to prevent future miscommunication or problems.
Use a Paycheck Advance App
Paycheck advance apps are a popular alternative to payday loans because they let the user withdraw a small percentage of their expected paycheck early. This money must be repaid on or by the next payday and usually comes with a small fee, but it’s a less costly option. Popular paycheck advance apps include SoFi Money, Chime, and Go2Bank.
Form a Lending Circle
A lending circle is a group of individuals who lend money to one another at either no or minimal cost. Every member of the lending circle must agree on how much money they’re willing to lend and borrow, how much everyone should contribute, and any interest or added fees. Each member then pays the agreed-upon amount to a pool and takes turns borrowing that money.
Alternatively, join a preexisting lending circle, such as Mission Asset Fund. Some well-established lending circles report to all three major credit bureaus, which can help you build credit.
Take on a Side Gig
If you’re struggling with paying your bills, pick up a side gig to improve your finances. Companies like Airbnb, DoorDash, Instacart, Uber/Lyft, and GrubHub are all popular ways of making a little extra cash on the side.
Sell Items You Aren’t Using
Online marketplaces like eBay, Facebook Marketplace, Shopify, Mercari, and Poshmark allow you to sell items you don’t need for extra money. If you’re artistic or creative, consider selling your creations on a platform like Etsy. Or, if you have a lot of unnecessary furniture, books, or other things, set up a garage sale.
Military Service Members Have Special Protections
The Military Lending Act (MLA) was enacted in 2006 as a way to protect active members of the military and their families from predatory lending practices. To qualify, you or your spouse must be an active-duty member with at least 30 days of service at one of the five military branches: Coast Guard, Marine Corps, Air Force, Navy, or Army.
Some key considerations:
- Loans covered under the MLA cap out at 36% APR.
- Creditors cannot charge a prepayment penalty.
- Lenders cannot require active service personnel to give up their legal rights under federal or state law.
- The Act covers most types of consumer loans, including payday loans, title loans, deposit advance loans, installment loans, and overdraft lines of credit.
- The Military Lending Act does not cover mortgage or mortgage refinancing loans, home equity loans, auto loans, or certain personal property purchase loans.
Payday Loan FAQs
What Happens if You Pay a Payday Loan Late?
Payday lenders target underbanked, low-income, and minority groups, so it’s no surprise that most borrowers are unable to pay off their payday loans on time. If you fail to pay your loan, you may have to take out a second payday loan to cover the first, which means higher interest and fees.
The lender may also try to automatically withdraw the payment from your account, resulting in transaction and overdraft charges. Eventually, your account may go to collections, which could damage your credit score. In extreme cases, the lender may take you to court where your wages could be garnished or your property seized.
Can You Go to Jail for Not Repaying a Payday Loan?
Although you will not go to jail for defaulting on your loan, you could be arrested for ignoring a court summons. Even then, you will most likely be released within a few hours or days, as long as you agree to appear in court when requested or you pay the bail money.
How Long Do You Have to Wait Between Payday Loans?
You can apply for a new payday loan as soon as you pay off the previous one. If you can’t pay off your current loan, your lender may let you roll it over into a new one.
If I Owe a Payday Loan, can I Get Another?
Different lenders have different rules. But most lenders allow you to take out multiple payday loans at once. However, taking out several payday loans is risky and could cause you greater financial hardship later.
What is the CFPB Payday Lending Rule?
The Consumer Financial Protection Bureau’s payday lending rule tries to regulate consumer loans and prevent unfair or predatory practices. This rule applies to short-term loans, longer-term balloon-payment loans (or extension of credit), and longer-term loans. The CFPB’s purpose is to protect consumers and provide them the resources they need to make informed financial decisions. For more information, check out the CFPB’s official rule here.
What is the Difference Between a Payday Loan and an Installment Loan?
Installment loans are short-term loans that can be paid in installments over a period of time. Payday loans are generally not considered installment loans because they are repaid in one lump sum. However, some lenders offer payday loans with the option of repaying them in installments.
How do I Get Out of Payday Loan Debt?
Although it’s tough to get out of payday loan debt, it’s not impossible. If working overtime or taking on an extra side gig or two isn’t an option, consider payday loan consolidation or a debt consolidation program. Alternatively, you could seek non-profit credit counseling to help you make a repayment plan. If you have multiple loans, prioritize those with high interest first.