What Is a Payday Loan? Pros, Cons and Safer Alternatives 

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Payday loans are short-term, small-dollar, high-interest loans. People often use them as a way to get fast cash, especially when you’re in between paychecks.

The downside to payday loans is, unfortunately, that they’re notoriously expensive, carrying fees that equate to annual percentage rates (APRs) of 400% or more. You must repay payday loans quickly. That said, payday loans should be treated at best as a last resort option.

Did You Know?

Most payday loans are for $500 or less and due within two to four weeks of the loan’s origination date.

How Do Payday Loans Work? 

Payday loans are offered online, over the phone or in-store, usually by specialized lenders. They’re easy to obtain.

Most payday lenders skip hard credit checks and only require you to verify your income. As a result, you can typically apply for a payday loan and receive funding within hours to minutes.

Payday Loans Have Costly Fees

Payday lenders charge high financing fees, commonly between $10 and $30 for every $100 borrowed. These fees amount to exorbitantly high interest rates, and you’ll face other costs if you opt to renew the loan or can’t repay the money as agreed. For instance, some lenders charge a rollover fee of $45 to extend a loan.

Payday Loan Cost Example

Say you borrow $400 and the payday lender charges a $15 financing fee for every $100 borrowed. You’ll owe a total of $460 when the loan comes due in 14 days, paying the equivalent of a 400% APR for the financing.

The chart below outlines the key steps in the payday loan application and repayment process.

Your experience and loan terms may vary depending on where you live. Many states have payday lending laws that cap loan amounts, fees and interest rates — and some don’t even allow payday loans at all.

What Do You Need for a Payday Loan? 

Compared to traditional financiers, payday lenders have lenient underwriting requirements. To get a payday loan, you typically need:

• Proof of recurring income  
• An active bank account
• State-issued identification, like a driver’s license or passport
• Social Security number or Individual Taxpayer Identification number 
• A valid and active email address

Most payday lenders also require an applicant to be at least 18 years old and reside in the state where they’re applying. They might prohibit applicants in bankruptcy. If you’re active-duty, you might also be restricted due to lending laws for service members.

Pros and Cons of Payday Loans

“Payday loans are designed for urgency, not strategy, and that distinction matters more than most borrowers realize,” said Eric Croak, Certified Financial Planner (CFP) and President of Croak Capital. With that in mind, here’s an overview and recap of the pros and cons of payday loans.

Pros 

• Fast access to cash 
• A hard credit check is rarely required.
• Minimal income requirements 
• Unsecured loan, no collateral required

Cons

• High interest rates 
• Small dollar amounts only
• Short repayment period 
• Renewal, repayment plan, late fees
• Can lead to insufficient funds and other banking fees
• Risk of falling into a debt cycle
• May hurt your credit if you don’t pay it back
• Won’t help with establishing credit

Payday Loans vs. Other Loan Types 

Refer to this chart to easily compare common payday loan terms with those of other popular borrowing methods. 

5 Safer Alternatives to Payday Loans 

Payday loans are considered particularly risky, as the high fees and short loan terms make them difficult to repay and easy to renew, triggering additional expenses and a potentially lengthy debt cycle.

“It is fast money at the cost of future control,” Croak said. “And for many people, that is where the spiral starts.”

Consider these alternatives if you need fast cash and are considering a payday loan.

1. Credit Union Payday Alternative Loans (PALs) 

“Start with your local credit union,” Croak said. Many of them offer Payday Alternative Loans (PALs) to members. 

PALs are more cost-effective than payday loans, carrying a maximum APR of 28%, and have longer terms, ranging from one to six months. They also offer other consumer protections, including a cap on the number of loans a borrower can take out in a six-month period.  

2. Borrowing from Friends or Family 

“This [option] may offer better interest rates, no credit check, and a longer loan term,” said Austin Kilgore, analyst with the Achieve Center for Consumer Insights. “But be aware that an unpaid loan can sometimes strain or damage relationships.”

To avoid issues when borrowing from loved ones, write a formal loan agreement, have a solid repayment plan, and communicate openly and honestly about issues as they arise. 

3. Payment Plans for Bills 

Many creditors and service providershave hardship programs for cash-strapped customers — and even ones that don’t are often willing to negotiate, waive fees, or extend deadlines. To explore your options, contact the provider in question.   

“If you owe a medical bill, for instance, ask your doctor about making payment arrangements,” Kilgore said. “Many providers will work with you to pay the bill in a way you can afford. This may free up cash to avoid a payday loan.” 

4. Local Nonprofits or Government Assistance 

If a service provider won’t negotiate, you might qualify for federal or state government assistance to cover household expenses. For instance, the federal Lifeline program helps low-income Americans find affordable phone and internet services, while the Low-Income Household Water Assistance Program (LIHWAP) helps with water bills.

You can find government resources in your area by tapping the USA.gov Benefits Finder. 

5. Employer Paycheck Advances 

Some employers offer paycheck advances to help employees cover emergency expenses. These advances typically cost less than a payday loan. Most employers don’t charge interest, though they may impose an administrative fee. You repay the advance through deductions from your future paycheck(s). 

Also, if you’re looking for traditional financing? Learn where to get a personal loan.

Is a Payday Loan Right for You? 

Consider a payday loan if:

• You need quick cash for a small emergency.
• Can repay the funds by the loan’s due date
• Have no other borrowing options

Avoid a payday loan if:

• You’re already behind on bills.
• You can’t repay the funds by the loan’s due date.
• You have other borrowing options available.

“A payday loan can make economic sense in some limited cases,” Kilgore said. “These might be to avoid an expensive late charge on a bill, or to avoid having phone, gas, or electricity service turned off. However, turning to a payday loan for these is most often a case of the cure being worse than the sickness.”

Payday Loans: What To Remember Before You Borrow

If you’re cash-strapped or already overwhelmed by existing high-interest balances, it would be a good idea to consider other debt relief solutions.

You could try like debt consolidation, credit counseling or debt settlement. If you have an overwhelming amount of debt and it’s reached a critical point, bankruptcy may be another way to reset your finances.

Whatever you decide, there’s an option that works best for your situation. If you’re struggling to pay back payday loans, learn how to get out of payday loan debt.

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