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In some cities, it seems like there are signs for payday loans on every corner, and there are plenty of ads online as well. But what are these loans, and are they worth applying for?
Here’s a look at the truth behind payday lenders and bad-credit loans and how much you could really end up paying if you decide to apply.
Payday loans are short-term loans known for their sky-high interest rates that often leave the borrower paying back quite a bit more than their original loan amount. Much as the name suggests, payday loans are based on your average paycheck.
These loans are unsecured, which means you won’t have to put up any collateral to borrow money. Instead, you’ll agree to pay back your loan in a predetermined period of time, usually around 30 days, and then pay hefty fees if you fail to settle the loan by the deadline.
Here’s how payday loans work:
You should receive a payment schedule that shows what you owe and when. Payments can usually be made online by transferring money directly from your checking account to the lender. Some payday lenders may also offer the option to make payments in person.
According to the Consumer Financial Protection Bureau, you can typically borrow around $500 with a payday loan. However, limits can vary above or below this amount depending on several factors, such as how much money you make and what state you live in.
Before you apply, consider prequalifying for a loan to see what amount you may be eligible for and the terms you might receive. This process typically involves a soft credit check, which won’t impact your credit score, and can provide insight into whether a payday loan is a viable option for your financial needs.
Payday loans can be quite pricey because they come with extra fees and very high interest rates on top of what you borrow. For example, some payday loans charge an annual percentage rate (APR) of 400%. Compare that to a typical credit card, which usually charges between 12% and 30% interest.
Say you take out a $500 payday loan that’s due for repayment on your next payday in two weeks. Based on a 400% APR, which is typical of the industry, you’d end up paying back around $622, which is the principal $500 plus $122 in interest.
Many lenders allow you to roll over or renew your payday loan. That would require paying the interest in full ($122 in our example) and then rolling the $500 to your next payday, where you’d owe the full interest amount again. With one loan rollover, you’d end up paying $744 in total, which is $244 more than the original $500 loan—nearly a 50% increase.
Understanding these costs is crucial for effective financial management. Explore our guide on calculating loan interest to learn more about how these costs are determined.
Payday and personal loans are similar in that they can both get you out of a pinch if you’re low on funds and need some help making ends meet. But variations in how much you can borrow, interest rates, borrowing terms and repayment schedules ultimately make these two very different options.
Let’s explore how payday loans differ from personal loans.
Working with payday lenders will not help you build credit because these lenders do not report their loans to any of the three major credit bureaus. Unless your payments are recorded with those bureaus, you won’t get credit for paying on time or paying off the loans in their entirety.
You can get a payday loan by visiting a local payday lender’s office or by applying for a loan online. You’ll need to provide a government-issued ID, copies of your pay stubs and some other key information as requested by the lender.
Loans are typically paid out immediately in cash.
You may find a payday lender that does not require a bank account, but it’s unlikely. Most lenders want to see a bank account as proof that you have money moving in and out regularly. If you find a lender that doesn’t require a bank account, watch out for even higher interest rates—the lender may be hoping you’ll default so you’ll be on the hook for major fees.
Lending companies that specialize in payday loans don’t care about your credit history. In fact, these loans are set up to cater to people with no or bad credit. They often skip the credit check during the application process, which can make it easier to secure a loan even if you have no credit history.
These are some risks associated with payday loans:
If you can’t pay your loan and find yourself unable to come to a new repayment agreement, your lender can take you to collections or even sue you to get their money back. If they score a favorable judgment in court, you could find your wages garnished, which means a portion of your paycheck will go directly to the lender to help pay off your debt.
Here are some alternatives to payday loans that might help you get the money you need without the risk.
Payday loans come with a high rate of interest, meaning many people will pay back exponentially more than they originally borrowed. These terms may be worth the risk for individuals without the credit scores and collateral necessary for a traditional loan, but payday loans should only be considered if the alternatives have already been ruled out.
Most payday loan companies don’t report loans and borrower activity to the three main credit bureaus, so it’s unlikely your loan will impact your credit score. Since payday loans typically do not require a credit check, applying will also not impact your personal credit score.
For alternative borrowing options, check out our guide on no-credit-check loans.
It’s unlikely that a creditor would agree to completely forgive a payday loan. That said, some payday loan companies will agree to an updated repayment plan that comes with better terms, a lower interest rate or a chance to consolidate multiple loans in a way that benefits the borrower.
Payday loans are considered unsecured debt because borrowers don’t have to put up any of their assets as collateral. A secured loan would require collateral, such as a house or collectible, in case of default.
There are quite a few companies offering payday loans online. First, check whether payday loans are legal in your state and if the companies you’re considering are allowed to operate in your area. Then, compare rates and terms to see which company offers the best deal.
Some states put a cap on the number of payday loans one individual can take out, but other states have no such regulations in place. That means you could technically take out an unlimited number of loans, but that comes with an exponentially higher risk of untenable interest rates and the potential for default.
The legality of payday loans differs from state to state. Sixteen states consider these loans to be predatory and have banned them altogether. Other states, like Nevada, allow payday loans but have put limits on how much a lender can give a borrower, based on a percentage of the applicant’s income.
If you are denied a loan, it’s a good idea to review your financial situation and consider exploring other borrowing options or financial assistance programs, such as hardship loans.
Alana Luna (Musselman) is a versatile storyteller with over a decade of writing experience. She is passionate about helping people build their business through unique and engaging content.
Some examples of her current freelance projects include building content strategies for small businesses, completing industry research to build case studies, crafting buyer guides and more.
She has a passion and keen ability to simplify complex ideas through storytelling to make it easier for readers to understand hard-to-digest information. To accomplish this, Alana’s writing holds strong three principles – content that educates, engages and entertains.
Blake Esken has over 15 years of experience in product management and has been a member of the Los Angeles Times staff for over five years.
As part of his role at the Los Angeles Times Commerce Team, Blake acts as the in-house reviewer and fact checker for LA Times Compare. He supervises all content for compliance and accuracy and puts to use skills he has honed through years of experience managing high-stakes projects for a range of industry-leading companies.
He has a strong background in data analysis, compliance, and communication, which allows him to support LA Times Compare through fact-checking in an effort to provide up-to-date and factual information across our content.
