What Is a Payday Loan?

What Is a Payday Loan?

You might need quick cash, and that's where payday loans come in—they're short-term, high-interest loans based on your income, usually amounting to part of your next paycheck.

I want you to understand that while they offer fast money, they come with steep interest rates and are often seen as predatory. If your credit is bad, look into other options like personal or emergency loans before jumping into this.

How Payday Loans Work

These loans go by different names across the country, but they're generally short-term for $500 or less, repaid on your next payday or when you get other income like Social Security, with terms of two to four weeks.

What stands out is their high interest—take a $100 loan for two weeks with a $15 fee; that translates to a 390% APR when you calculate it yearly.

When you take one out, you authorize the lender to deduct from your bank account or give a post-dated check. If you can't pay, some states let you roll it over, which just deepens the debt.

Giving lenders bank access has caused issues, like repeated withdrawal attempts leading to overdraft fees. The CFPB limits this to two tries after legal challenges.

How to Get a Payday Loan

You can apply online or at local storefronts. You'll need a bank account, government ID, and proof of income like pay stubs.

Lenders skip credit checks and don't require collateral since these are unsecured loans. But you must allow bank access or provide a post-dated check for the full amount.

Payday Loan Interest Rates

Most states cap interest at 5% to 30%, but payday lenders get exemptions to charge much more in allowed states.

Thirty-seven states permit them with some restrictions, while others ban them. In California, loans max at $300 with a 15% fee, equating to 390% APR on a 14-day term.

The Truth in Lending Act requires fee disclosure, but people often ignore it in a rush for cash.

Are Payday Loans Fixed or Variable?

These loans are paid in one lump sum on payday, so the interest is fixed. Lenders often charge a flat fee, like $10 to $30 per $100 borrowed, instead of calling it an interest rate.

Is a Payday Loan Secured or Unsecured?

Most are unsecured, meaning no collateral or valuable item is needed, unlike pawn shop loans.

Can You Get a Payday Loan Without a Bank Account?

Some lenders accept credit union accounts or prepaid cards if you lack a regular bank account.

How Long Do Payday Loans Stay on Your Credit Record?

Lenders don't report to credit bureaus, so timely payoff won't show up or affect your score. But defaulting and going to collections can damage your credit.

Can Payday Loan Debt Be Discharged in Bankruptcy?

Yes, like other debts, it can be discharged, but taking one out right before filing might lead to fraud accusations from the lender.

The Bottom Line

Payday loans cover short-term needs without credit checks or collateral, but their high fees and rates are the big downside. If you're thinking about one, check alternatives like emergency loans for bad credit first.