# Understanding Payday Loans: Costs, Process, and Legal Considerations

> **Definition**
>
> A payday loan is a short-term, high-cost loan, usually equal to the borrower's next paycheck.

## What Is a Payday Loan?

Payday loans are short-term, high-interest borrowing options based on income, typically for amounts under $500. These loans are meant to be repaid quickly, often by the next paycheck, due to the significantly high fees and interest rates. Payday loans involve potential financial pitfalls, such as debt that grows uncontrollably if not repaid on time. Those in financial need—even those with bad credit—have safer alternatives. These include [personal](https://www.investopedia.com/the-best-personal-loans-for-bad-credit-8761245) or [emergency](https://www.investopedia.com/emergency-loans-for-bad-credit-5075539) loans.

### Key Takeaways

*   Payday loans are short-term, high-interest loans often regarded as predatory due to their exorbitant rates.
*   The loans typically must be repaid on the borrower’s next payday, or when they receive other income.
*   Payday loans are usually unsecured, requiring no collateral but often requiring lenders' access to the borrower’s bank account.
*   They are not available in all states, with some states prohibiting payday loans entirely.
*   Many payday lenders show charges as a fixed fee per $100 borrowed rather than as an interest rate.

![What to Know About Payday Loans](https://www.investopedia.com/thmb/OHCEdLOumjkEdOUCUDCUAuUt0-s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Payday-loans_final-9a4b8a6d6e754a908e10be10d17e5b93.png)

*— Investopedia / Michela Buttignol*

## Understanding the Mechanics of Payday Loans

Payday loans have various names across the country, and there is no standard definition. But they typically are short-term loans for amounts of $500 or less. In general, they must be repaid in full on the borrower's next payday, or when the borrower receives other income, such as a Social Security payment. As such, they typically have terms of two to four weeks.

Payday loans are known for their high interest rates. For example, a two-week loan for $100 with a $15 fee equates to an [annual percentage rate (APR)](https://www.investopedia.com/terms/a/apr.asp) of 390%. You can calculate this by extrapolating the $15 every two weeks over a full year. That comes to $390 on what originally was a $10 loan.

Borrowers usually allow lenders to withdraw funds from their accounts on the due date or provide a post-dated check for the amount owed, including interest and fees. In some states, borrowers who are unable to repay the loan at that point can roll it over into a new loan, but this digs them further into debt.  

Allowing payday lenders access to borrowers' bank accounts has created problems in its own right. According to the CFPB, some lenders have made repeated attempts to withdraw money from borrower accounts, even after it's clear the money isn't there. (In one instance, the CFPB said, a lender made 11 attempts in a single day.) As a result, borrowers can be subject to multiple overdraft or nonsufficient funds fees from their banks. A CFPB rule limits lenders to two such attempts after surviving a challenge from the payday lending industry that went all the way to the U.S. Supreme Court.

## Steps to Obtain a Payday Loan

1\. Identify possible online providers or local lenders who offer payday loans.  
2\. Prepare necessary documents, including [a payday loan application](https://www.investopedia.com/ask/answers/102814/what-are-basic-requirements-qualify-payday-loan.asp), a government ID, and proof of income.  
3\. Apply by providing these documents along with access to your bank account or a post-dated check.  
4\. Review the terms before authorizing the lender to deduct funds from your bank account upon the due date.

Payday lenders will not normally run a credit check on you. Their loans are unsecured, meaning that you don't have to put up any collateral as you would, for example, with a car loan. However, as mentioned above, you will have to give the lender authorized access to your bank account or write a post-dated check for the full amount you'll owe.

> **Important**
>
> Some federal credit unions offer what they call payday alternative loans (PALs). These lower-rate loans can range from $200 to $1,000, with terms of one to six months. 

## Exploring Payday Loan Interest Rates

While most states have [usury laws](https://www.investopedia.com/terms/u/usury-laws.asp) that limit interest charges to anywhere between 5% and 30%, [payday lenders](https://www.investopedia.com/if-the-economy-struggles-will-people-turn-to-payday-lenders-the-answer-is-surprising-11740285) fall under exemptions that allow them to charge many times that in certain states.

Thirty-seven states allow payday loans, but many impose restrictions or prohibit them entirely.

For instance, in California, payday lenders can only lend up to $300 at a time. They can charge a fee of up to 15% of the loan amount, with a maximum of $45. Although 15% doesn't seem exceptionally high, on a 14-day loan, it becomes the equivalent of an APR of 390%.

While the federal [Truth in Lending Act](https://www.investopedia.com/terms/t/tila.asp) requires payday lenders to disclose their finance charges, many people apparently overlook the costs in their hurry to get the cash.  

## Are Payday Loans Fixed or Variable?

Payday loans are usually meant to be paid off in one [lump-sum payment](https://www.investopedia.com/terms/l/lump-sum-payment.asp) when you get your paycheck. Because of this, the interest rate on these loans is fixed. In fact, many payday lenders don't even express their charges as an interest rate, but they instead charge a fixed flat fee that can be anywhere from $10 to $30 per $100 borrowed.

## Is a Payday Loan Secured or Unsecured?

Most payday loans are unsecured. This means that you do not have to give the lender any collateral or hand over a valuable item as would to get a pawn shop loan.

## Can You Get a Payday Loan Without a Bank Account?

Some payday lenders accept credit union or prepaid card accounts if you don't have a regular bank account.

## How Long Do Payday Loans Stay on Your Credit Record?

Payday lenders do not normally report to the credit bureaus, so the loan is unlikely to appear in your credit reports or affect your credit score, as long as you pay it off in time. If you default on the loan, however, and it's turned over to collection agency, that could show up on your credit reports and damage your credit score.

## Can Payday Loan Debt Be Discharged in Bankruptcy?

Yes, a payday loan, like many other types of debts, can be discharged in bankruptcy. However, you could face legal problems if you took out the loan shortly before filing for bankruptcy and the lender accuses you of fraud.

## The Bottom Line

Payday loans are short-term, high-interest financial solutions that should only be considered in emergencies due to their high cost. Such loans often lead to financial harm for borrowers via a growing cycle of debt due to their high rates and fees. Payday loans can be unsecured but lenders require access to a borrower's bank account. This may lead to significant bank fees and other financial complications. All told, payday loans can damage your financial well-being and should be avoided if possible. Those in financial need should explore alternative options such as personal loans or payday alternative loans (PALs) offered by federal credit unions. These might offer lower rates and more manageable terms. Bear in mind that payday loans are illegal in some states.

> **Article Sources**
>
> 1.  Consumer Financial Protection Bureau. "[What Is a Payday Loan?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/)"
>     
> 2.  Consumer Financial Protection Bureau. "[Payday Loan Protections](https://www.consumerfinance.gov/payday-rule/)."
>     
> 3.  Consumer Financial Protection Bureau. "[Prepared Remarks of CFPB Director Rohit Chopra Regarding the Supreme Court's Decision in CFPB v. CFSA](https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-rohit-chopra-regarding-the-supreme-courts-decision-in-cfpb-v-cfsa/)."
>     
> 4.  MyCreditUnion.gov. "[Payday Loan Alternatives](https://mycreditunion.gov/life-events/consumer-loans/payday-loan-alternatives)."
>     
> 5.  NCSL. "[Payday Lending State Statutes](https://www.ncsl.org/financial-services/payday-lending-state-statutes)."
>     
> 6.  California Department of Financial Protection and Innovation. "[Consumer Financial Education: Other Loans](https://dfpi.ca.gov/consumer-financial-education-other-loans/)."
>     
> 7.  Code of Federal Regulations. "[Title 12, Chapter X, Part 1026 — Truth in Lending (Regulation Z)](https://www.ecfr.gov/current/title-12/chapter-X/part-1026)."
>     
> 8.  Consumer Financial Protection Bureau. "[What Are the Costs and Fees for a Payday Loan?](https://www.consumerfinance.gov/ask-cfpb/what-are-the-costs-and-fees-for-a-payday-loan-en-1589/)"
>     
> 9.  Consumer Financial Protection Bureau. "[What Do I Need to Qualify for a Payday Loan?](https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-qualify-for-a-payday-loan-en-1593/)"
>     
> 10.  Consumer Financial Protection Bureau. “[I Heard That Taking Out a Payday Loan Can Help Rebuild My Credit or Improve My Credit Score. Is This True?](https://www.consumerfinance.gov/ask-cfpb/i-heard-that-taking-out-a-payday-loan-can-help-rebuild-my-credit-or-improve-my-credit-score-is-this-true-en-1611/)”
>      
> 11.  Nolo. "[Payday Loans in Bankruptcy](https://www.nolo.com/legal-encyclopedia/payday-loans-bankruptcy.html)."