Payday loans are typically short-term, unsecured loans characterized by high interest rates that don’t usually require a credit check.
While there is no exact, universal definition for the term, the U.S. Consumer Financial Protection Bureau says this type of loan is generally for $500 or less and is typically due on a borrower’s next payday. States have varying laws regulating these types of fast loans, but they may be available to Americans via storefront payday lenders or online, depending on location. The due date on payday loans is typically two to four weeks from the date of issue, and lenders generally don’t consider borrowers’ credit scores or ability to meet other financial obligations when approving the loan.
To secure a payday loan, payday lenders often require a personal check from the borrower upfront in the amount of the loan, plus interest and fees, for future deposit. They often require direct access to the borrower’s bank account.
Payday lenders hold the personal check until the borrower receives his or her next paycheck, direct deposit or social security payment. Depending on the terms of the loan and the particular state’s laws, some payday lenders offer long-term repayment plans that authorize them to make multiple electronic withdrawals from the borrower’s bank account.
The average payday loan term is about two weeks, and loans typically range in size from $50 to $1,000. In exchange for fast loans that don’t require credit checks, payday borrowers usually pay exorbitantly high interest rates and fees on their loans. Payday lenders often charge annual percentage rates, or APR, of 400% or higher on their loans, along with finance charges of between $10 and $30 for each $100 borrowed.
The only requirements to qualify for most payday loans are an open bank account in relatively good standing, regular income and a source of identification.
Because little consideration is given to borrowers’ financial situation or creditworthiness, the CFPB has found payday loans have a high default rate of about 20%. In addition, about 80% of payday borrowers roll over or reborrow loans within 30 days of their initial loan.
Borrowers in qualified states can apply for a payday loan online from companies such as MoneyMutual, CashUSA.com and BillsHappen. Many payday lenders also have thousands of physical store locations throughout the U.S.
In cases of financial emergencies or life-or-death situations, payday loans may be one of the only places Americans with bad credit can turn for temporary financial relief. Because of the deception and predatory behavior prevalent in the payday lending business, however, the CFPB, the Federal Trade Commission and other federal and state regulators have repeatedly warned Americans about the dangers of payday lending and placed restrictions on the activities of payday lenders.
A 2016 study conducted over five years by Pew Charitable Trusts found that 12 million Americans took out payday loans annually, and those borrowers collectively paid $9 billion per year in loan fees alone.
- Speed. Payday loans are fast, and lenders often grant same-day or next-day approval.
- Ease of use. It is usually easy to be approved for a payday loan as long as the applicant has a steady source of income, a bank account in good standing and identification. Borrowers can even get approved for a payday loan online. While some critics argue payday lending is inherently predatory, there are laws in place to protect borrowers’ rights.
- Availability. Depending on the situation, payday loans can be one of the only viable sources of emergency cash for borrowers with bad credit.
- High cost. Payday loans can come with annual interest rates of 400% or more, and financing fees can represent 15% to 30% of the size of the loan. These high interest rates stand out even more when compared with the roughly 16.17% national average credit card interest rate or the 4.25% average interest rate on a 30-year mortgage as of late February 2022.
- Debt cycle. Because of the interest and fees, a payday loan can easily require the borrower to turn over the majority of his or her next paycheck, creating an opportunity for borrowers to fall into a cycle of repeat loans.
- Harassment. Payday lenders have a reputation for exploiting financially vulnerable borrowers and using aggressive and harassing collection practices.