What is a payday loan?

A payday loan is a small, short-term loan (usually for $500 or less) that you're expected to repay on your next payday.

Because payday lenders usually only require a government ID, proof of income, and an active checking account, payday loans are easy to qualify for and can provide cash fast. But read the fine print and you'll see they come with extremely high fees and APRs that can exceed 400%.

Numerous states have banned or severely limited payday loans by capping interest rates. In 2020, for example, a Nebraska ballot measure restricted lenders from charging fees, interest or combined rates exceeding 36% annually.

While 36% is higher than the average credit card APR, it's much less than what most payday lenders charge.

A payday loan provides quick cash repaid in a single lump sum (plus fees) when your next paycheck arrives, or within 14 days.

What do you need to qualify for a payday loan?

You typically need:

• A valid government-issued ID
• Proof of income (such as a pay stub)
• An active checking account

You may also need to provide an email address, telephone number and Social Security number.

How much can you borrow with a payday loan?

Most payday lenders will lend $100 to $500, though some states allow up to $1,000. Borrowing the maximum increases the risk that you'll have trouble repaying and be hit with rollover fees.

How fast can you get money with a payday loan?

Many storefront payday lenders provide same-day funding, and some online lenders offer cash within minutes of approval. Most payday lenders don't run a credit check, which speeds up approval.

1. Application requirements

To apply, you'll need a valid ID, proof of income and an active checking account. Most lenders also require a post-dated check or authorization to debit your bank account automatically.

2. Fees and APRs

Payday lenders typically charge $10 to $30 per $100 borrowed, which can amount to an APR well over 400% for a two-week loan. If you're unable to pay on time, the lender may charge a late fee and your bank may tack on an overdraft fee or non-sufficient funds (NSF) charge.

3. How lenders collect repayment

On your next payday, the lender will automatically withdraw the loan amount and associated fees from the same account the loan was deposited into. If your balance is too low, you may incur bank overdraft fees.

4. What happens if you roll over a payday loan?

A rollover lets you delay repayment by adding a fee that extends your due date. Each rollover adds new charges, which can quickly inflate the amount you owe. Many borrowers end up paying more in rollover fees than they originally borrowed.

1. Extremely high fees and APRs

• Fees are often $10 to $30 per $100 borrowed.
• That can equal APRs in excess of 400%.
• Some lenders add charges for prepaid debit card disbursements, late payments and rollovers.

2. Automatic withdrawals and overdraft fees

Lenders typically use automatic bank withdrawals to collect payments. If there is insufficient funds in the. account, you may be hit with multiple overdraft fees, sending you further into financial hardship.

3. Rollovers that trap you in debt

If you can’t repay the loan on time, your lender may offer a rollover until your next payday. Each rollover adds more fees, making your balance grow quickly. This debt cycle can make it difficult to escape dependency on payday loans.

4. Credit score damage

While most payday lenders don’t report payments to credit bureaus, unpaid loans can be sent to a collections agency. Collection accounts appear on your reports and can significantly harm your credit score.

5. Legal action and wage garnishment

If you default, the lender may sue to collect the debt. A court judgment could lead to wage garnishment, and the judgment will show up on your credit reports.

1. Personal loans

Personal loans typically offer much lower rates and longer repayment periods than payday loans. Oportun's minimum loan amount is just $300 and borrowers have at least 12 months to make full repayment, making it an excellent alternative to a payday lender. If you need more money (or time), Upstart approves loans starting at $1,000 and has payment terms of 36 or 60 months.

2. Cash advance apps

Cash advance apps like Earnin or MoneyLion offer up to $1,000 in advance of your paycheck, often with no mandatory fees or interest. There are late fees and optional tips, however.

3. Payday alternative loans (PALs)

Credit unions offer PALs up to $2,000 with capped fees, lower APRs (often around 28%), and installment-based repayment. Approval is based more on income and account behavior than credit history.

• Mobility Credit Union offers PALs of up to $800 to applicants with at least 6 months of membership and active direct deposit. There is a set 28% APR and repayment terms range from three to six months.
• Century Federal Credit Union offers up to $1,000 available the same day via ACH deposit. The APR is only 25% and borrowers enjoy repayment terms of up to six months.

4. Credit card cash advance

Even with their higher interest rates, credit card cash advances are less expensive than payday loans. Some cards — like the PenFed Platinum Rewards Visa Signature® Card — charge no cash advance fee and offer competitive APRs.

5. Buy Now, Pay Later (BNPL)

If you have sudden expenses you haven't budgeted for, BNPL services like Affirm or Klarna can split them into smaller payments, often with 0% interest if paid on time.

6. Payroll advances

Your employer may advance you a portion of your next paycheck, often interest-free. The money is repaid via deductions from future paychecks.

Payday loans offer quick access to cash but come with some of the highest costs of any borrowing option. Their steep fees, short repayment windows and rollover risks can trap you in a cycle of debt. If you need money fast, consider safer alternatives — like personal loans, cash-advance apps, or credit union PALs — before turning to a payday lender.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed financial decisions. Every loan article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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