What Is a Payday Loan?

A payday loan, sometimes known as a “paycheck loan,” is a short-term, high-cost loan that’s usually due on your next payday.

These loans are often for small amounts – typically $500 or less – and are designed to give you quick access to cash.

Lenders can charge very high interest rates and fees, often exceeding 400%.¹ Because of their unfavorable terms, payday loans are often considered a last resort. The National Association of Consumer Advocates considers payday loan lenders to be predatory.²

Payday loans can help in an emergency, but can also create a heavy financial burden on the borrower. That’s why you may want to consider other ways to quickly borrow money if you need it.

Payday loans are pretty easy to get, and the process is somewhat similar to how you might apply for another type of loan, like a spot loan.

1. You apply in person or online, providing proof of income, ID, and bank account information.
2. The lender approves the loan and either deposits cash into your account or gives you the cash directly.
3. You give the lender permission to withdraw the loan amount (plus fees) from your checking account on your next payday.
4. If you can’t repay it in full, the loan “rolls over,” adding new fees and increasing your debt.

Payday lenders don’t usually report your payment activity to the major credit bureaus, meaning payday loans won’t help you improve your credit score like other loans.³

Payday loans don’t “cost” any upfront money, and you don’t need to put up collateral like your car to get these small loans.

However, the interest rate on a payday loan is on the higher end of the spectrum for short-term loans. States offering them usually cap lending amounts at no more than $500.⁴

The APR (annual interest rate) on these loans can range from 140% to 662% for states that still allow lenders to make payday loans.⁵ For context, the average interest rate on a two-year personal loan has stayed below 12.5% for the past decade.⁶

So, the “cost” of a payday loan comes with the high interest rates and fees that can trap you in debt.

Taking out a payday loan alone does not affect your credit. Most payday lenders don’t look at your credit score before giving you a loan, nor do they report your positive payment history to the three national credit bureaus – Equifax, Experian, and TransUnion.

However, if you don’t pay back the payday loan, your debt could be sent to collections, and a collection account could hurt your credit score.

Payday loans have a short turnaround and high payments, increasing the chances that you’ll be unable to repay the loan amount. Not being able to make your payments on time negatively affects your credit score.

In general, payday loans should be considered as a last resort. If you have no other options, here’s a step-by-step guide on how to get a payday loan:

• Really research the payday lender. Some payday loan lenders may impose extreme loan terms on borrowers. Research different lenders online, read customer reviews, and check if they’re licensed to operate in your state. Go for payday lenders who clearly disclose their terms and conditions, including fees and interest rates.
• Collect your documents. To apply for a payday loan, you’ll need to provide proof of income (like pay stubs), identification (like a driver’s license), and a bank account. Make sure you have all these documents ready to avoid any delays.
• Make a plan to pay back the loan. Before accepting a payday loan, calculate the total amount you’ll owe, including fees and interest, and how much of your upcoming income will need to go towards repaying the loan.

There are many ways to pay off your payday loan.

• You can also get extra cash through a side hustle and put it towards paying off your loans.
• If you have federal student loans on top of a payday loan, you can call your loan servicer and see if you can defer your loans or put them in forbearance.
• You can also consider an income-driven repayment plan, where your monthly payments are lowered to a small portion of your discretionary income. This way, you’ll have more money to allocate toward tackling your payday loan.

If none of these options work, debt settlement or bankruptcy may be the only way to break free of payday loan debt.

Remember, when you miss payments or stop making payments on a payday loan, lenders can turn the debt over to collections, which creates a negative entry on your credit file and could make it difficult to borrow money in the future.

Payday loans often come with high fees and interest rates that make your situation worse.

The good news? There are safer, more affordable payday loan alternatives to help you cover costs. Here are some options to consider before a payday loan:

1. Chime’s alternatives

Chime members have options when they need access to cash:

• MyPay^®: At Chime, MyPay lets you get up to $500 of your pay before payday.^{^} There are no mandatory fees, no interest,^~ and no credit checks. Just open the Chime app, see how much of your pay you’re eligible to take as an advance ahead of payday, and select how much you want.
• SpotMe^®: If you just need a little extra money to cover an expense, Chime also offers SpotMe for eligible members. Overdraft up to $200¹ without fees.⁸
• Get Paid Early: Chime’s app gives eligible members faster access to their paycheck. If you have a Chime account and set up direct deposit, you will be able to access your money up to two days earlier than traditional banks.⁹

Learn more about the differences between MyPay, SpotMe, and Get Paid Early.

2. Try a payday alternative loan

Some credit unions offer payday alternative loans, or PALs, which are loans designed to provide a lower-cost alternative to payday loans. This option allows you to borrow up to $1,000, with the loan term ranging from one to six months.¹⁰ As long as you’re a credit union member for at least a month, you can take out a PAL.

Payday alternative loans can still carry fairly high interest rates. Fortunately, PAL interest rates are capped at 28% by law, far better than what you typically see on a payday loan.¹¹

3. Take out a personal loan

If you’re in need of a larger loan, personal loans from banks or credit unions could be a better option. While the approval process can be longer than payday loans, personal loans generally offer these benefits:

• Lower interest rates than payday loans
• Longer repayment terms
• Fixed monthly payments, making it easier to budget
• Potential to improve your credit score if you make timely payments

Note: If you have a poor credit score, it might be harder to qualify for a personal loan with a traditional bank. In this case, consider applying with a credit union or an online lender who may be more lenient.

4. Use a line of credit

If you want to borrow money without taking out a loan, consider using a line of credit.

A line of credit is a flexible borrowing option allowing you to access funds as needed, up to a set limit.

With a line of credit, you only pay interest on the amount you borrow. Many banks and credit unions offer personal lines of credit, which can be used to cover unexpected expenses without the high fees and interest rates associated with payday loans.

If you’re in debt and wondering how you’re going to pay your bills, opting for a payday loan may seem helpful. But there are better choices to consider first. Using the above payday loan alternatives, you can find a different solution.

Once you’re looking ahead, start building up your emergency fund. This way, you can handle future unexpected expenses without borrowing money.