What Is a Payday Loan

Whether it's an unexpected expense like a medical emergency or car repair, paying your rent or a holiday that has created an immediate need for cash, a payday loan is one way to bridge the gap between the money you have and the money you need. In this in-depth guide to payday loans, we'll walk you through exactly what a payday loan is, how it functions, how to get one and everything else you need to know.

What Is a Payday Loan?

A payday loan is a short-term, high-cost loan that usually is due in full 14 or 30 days later (on your next payday). The loan amounts range from $100-$1,000 with the average being a $500 loan. They're offered through storefront locations and online and your ability to get one will depend heavily on the state in which you live.

To issue a payday loan, the lender will likely require a form of ID, your bank information, proof of income like a paycheck stub and either a post-dated check or your approval to debit the loan balance plus any fees on the loan's due date. You can always pay your payday loan prior to its due date but if you don't, the lender will either cash your check or debit your account for the outstanding balance.

Prior to receiving your loan, your payday lender will issue you a loan agreement for you to sign. Make sure you read it carefully so you understand what your obligations are, when the loan comes due and what the total amount you'll be required to pay is.

If your account doesn't contain enough to pay off your loan, you might incur additional charges. Alternatively, some states and lenders allow you to renew or roll over your loan in the event you can't pay it in full on its due date. Some loans might even be structured so that you can pay your balance over time. But most will require what's called a balloon payment, i.e. the entire balance (including interest charges and other fees) is paid at once. 

Are Payday Loans Legal?

Payday loans are regulated on a state-by-state basis. Some states prohibit payday lending through various laws, some restrict the amount of money you can borrow and at what cost, and some states allow most types of payday loans.

In order to issue you a loan, a payday lender must be licensed in the state in which you're located (this goes for online lenders as well). The loan they give you must also follow the state's specific guidelines regarding interest rates on payday loans, fees, the ability to renew or roll over your payday loan and the manner in which they can collect payment.

Also, under the Military Lending Act, payday lenders that charge interest rates above 36% APR are prohibited from lending to active duty military service members, their spouses and dependents.^[1]

Here are the states that allow payday loans with few restrictions:^[2]

• Alabama
• Alaska
• California
• Delaware
• Florida
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Michigan
• Minnesota
• Mississippi
• Missouri
• Nebraska
• Nevada
• North Dakota
• Ohio
• Oklahoma
• Rhode Island
• South Carolina
• Tennessee
• Texas
• Utah
• Virginia
• Washington
• Wisconsin
• Wyoming

These states allow payday lending but with caps on APRs, limits on lending amounts or other restrictions:^[2]

• Colorado
• Maine
• Montana
• New Hampshire
• New Mexico
• Oregon
• South Dakota

These are states that have either outlawed payday loans completely or have put in place such stringent regulations that payday lenders choose not to operate in these jurisdictions:^[3]

• Arizona
• Arkansas
• Connecticut
• Georgia
• Maryland
• Massachusetts
• New Jersey
• New York
• North Carolina
• Pennsylvania
• Vermont
• West Virginia
• Washington, D.C.

To find out how your state treats payday lending, you can contact your state's bank regulator or state's attorney general.

How Do Payday Loans Work?

At their core, payday loans work similarly to other loans you might take out. Whether you’re borrowing from traditional lenders or IT companies offering financial services, the lender uses certain information to determine how much they're willing to lend you and at what price (i.e., the APR and other fees). They set the due date, issue you the money, and then collect payment on the due date.  It's just the details that are different.

When you either go to the payday lending retail location or the online lender's website, you will make a request for the amount you want to borrow. The lender will then ask for proof of income like a paycheck stub so they know you have a way to pay back the loan. They will likely use this pay stub as a way to determine how much they will lend you. But they won't require any form of collateral to secure the loan.

Once the loan amount has been determined, the lender will ask you for your next pay date and set that (either 14 or 30 days from then) as the due date of your principal balance plus interest and any other fees. They will tell you the cost of the loan, then issue you a loan agreement for you to read and sign.

Make sure you read the agreement carefully because in it, you will find the ways in which you can pay back the loan, whether or not you're entitled to a loan rollover or renewal, your due date and the late fees and other penalties you'll incur if you don't pay it back on time.

Your loan will be issued in the form of cash, a prepaid debit card or online deposit into your bank account.

To ensure payment, the lender will likely ask for a post-dated check for the total balance or have you sign an agreement to have the balance debited from your account via ACH. If you don't pay your loan's total balance prior to its due date, the payday lender will either cash your check or debit your account for the agreed-upon amount.

How to Find a Nearby Payday Loan Store?

If you're looking for a physical payday loan store, you'll want to first make sure you're in a state that allows payday lending. If that's the case, you can use our search bar below to find direct payday lenders in your area.

How to Get a Payday Loan Online

Just like ordering groceries (or any kind of shopping) and arranging many other services, you now don't even need to leave your house in order to get a payday loan. If you want to apply for a payday loan online, you can either search for the best online payday loan services yourself on the Internet, or you can use WeLoans to find payday lenders with a few strokes of the keys.

WeLoans has relationships with an extensive network of lenders and by entering a few pieces of information and providing documentation of your income and U.S. citizenship, you can receive and compare a wide range of payday loan proposals within minutes. Once you accept an offer, the money is deposited into your account quickly and easily.

What Are the Requirements to Get a Payday Loan?

In order to receive a payday loan you must meet the following criteria:

• Be 18 years of age or older.
• Have an active US bank account.
• Have a source of regular income. This can be a paycheck, a social security payment, a pension or another source of regular income. You must be able to provide your payday lender with proof of this income as well as the next date you will receive payment.
• Some lenders will require you to be a U.S. citizen, but this is not the case for all lenders.
• Provide valid contact information, including a working email address, phone number and home address.
• Must not be an active duty military service member, the spouse of an active duty service member or a dependent of one.

Click here to learn more about the requirements for payday loans.

What to Consider if I Want to Get a Payday Loan Online?

Many of a payday loan's key features can make applying for one a risky endeavor if you're not borrowing from a trustworthy payday lender. These types of loans also tend to be expensive and the consequences for late payment even more so, so here is a list of questions to ask yourself before you apply for a payday loan online:

1. How much does this loan cost? To answer this question, you'll want to check out our payday loan calculator below.
2. Can I afford to pay it back in the timeframe given? Since an online lender will most likely have your checking account information and your approval to debit your account, they can continue to do so until they're paid (some states restrict this). Which means you could end up with multiple NSF (non-sufficient funds) charges.
3. Will I be able to meet my other financial obligations for the month if I pay this loan back on time?
4. Is this a site I trust to secure my personal information?
5. Is this lender licensed in my state? Unlicensed lenders might not follow your state's consumer protection laws and could sell your personal information without your approval.
6. Are you entering your personal information into the actual lender's site or are you giving it to a lead generator who will then send it to the lender? The fewer hands your personal information passes through, the better.

See also: What To Consider Before Getting an Online Payday Loan?

How Much Can I Borrow From a Payday Loan?

Payday loan amounts range from $100-$1,000 or more, depending on your income, the lender you've applied to and where you live. Some states like Alabama and California limit the maximum amount you can borrow ($500 and $300, respectively), some don't.^[4]

So if you have a specific cash need, you'll want to first determine whether or not your state has a maximum payday loan limit. Then, you'll want to find a lender that issues loans in the amount you want to borrow. You can use WeLoans to find lenders that issue a wide range of loan amounts.

One thing to keep in mind is that payday lenders generally don't take into account your ability to pay back the loan while meeting your other financial obligations. They simply look at the income you will receive on your next payday. So it's up to you to determine whether or not you can actually afford the loan you're taking out. You want to be able to pay back the loan on time while staying current on your other bills.

What Are the Interest Rates of Payday Loans?

Payday loans carry a wide range of interest rates and some might not even refer to their loan charges as interest rates but might call them fees instead. Regardless, the Truth in Lending Act requires lenders to disclose all of the fees and interest rates you'll be charged for borrowing money. This makes it easier for you to calculate the true cost of your loan.

The true cost of your payday loan is what is referred to as its APR (annual percentage rate). You'll want to use APR to measure the cost of your loan because this is the standard used to judge the cost of other types of debt like car loans and mortgages. To calculate your APR:

• Add up all of the fees your lender charges, including the interest payment. The good thing about your loan coming due on your next payday is that there's just one interest charge to calculate.
• Divide the total fee amount by the loan principal.
• Multiply that number by 365.
• Divide that number by the loan repayment term (so 14 or 30 days).
• Then multiply the resulting number by 100. You will likely get an APR over 100%.

If this seems too complicated, you can use our payday loan calculator here:

Learn more: Why Is the APR on My Payday Loan Different from the Advertised Interest Rate, and How Can I Use It?

What Else Do I Need to Pay for a Payday Loan?

Other fees associated with payday loans include:

• Rollover or Renewal fees.
• Fees to repay on a payment schedule.
• Late fees.
• Fees associated with prepaid debit cards.

Rollover or renewal fees: Some lenders will allow you to roll over or renew your loan if you are unable to repay it on time, but they will charge you a fee for doing so. 

Payment schedule: Some states allow borrowers of payday loans to pay their loan back on a repayment schedule if they're having trouble doing so in one lump sum. Among the states that allow this, some allow lenders to charge borrowers additional fees for the repayment schedule, and some states prohibit this. To find out your state's policy regarding repayment schedules and the fees associated with them, contact your bank regulator or attorney general.

Late fees: If you're unable to pay your loan when it's due, the lender can, and most likely will, assess a late fee. In addition to this late fee, you will also likely incur a returned check fee or NSF fee from your bank. If the lender has the authorization to debit your account via ACH, some states allow them to continue to do this until they receive payment. This could result in more NSF charges.

Prepaid debit cards: If your lender loads your loan onto a prepaid debit card, here are the actions for which the debit card administrator can assess charges:

• Adding money
• Checking balance
• Purchases
• Monthly fee

Check out: What Are the Fees and Costs That May Be Charged on a Payday Loan?

Can I Get a Payday Loan With No Credit Checks?

Yes, you can get a payday loan with no credit checks. In fact, most payday lenders don't run even a soft credit check. They consider factors such as your income, employment status and outstanding debts to determine your loan eligibility. So if you have poor credit, but meet the other criteria for a payday loan, you won't be turned away.

You might even be able to use your payday loan to improve your credit score if you use the funds to pay your credit card bills on time or to bring a delinquent account current. Since both of these factors can create major dips in your credit score, using funds to take care of them can improve your ability to borrow other loans in the future.

Learn more about the 10 best payday loans with no credit checks you can apply for.

How to Know if a Payday Lender Is Licensed in My State?

To find out if and where the payday lender is licensed, you should check with your state's bank regulator or attorney general.

There are a couple of reasons it's important to make sure the payday lender is licensed in your state. The first is that each state has laws regarding how payday loans function and how much they cost. So you want to make sure that your payday lender is abiding by those rules. And one way to do this is to make sure they're licensed to operate in your state.

Another reason to check the lender's licensing is that payday lenders require you to submit sensitive personal information prior to issuing you the loan. So you want to make sure they're a trustworthy organization.

And generally, unlicensed lenders could:

• Debit money from your account without permission.
• Sell your personal information without your permission.
• Charge an interest rate that's higher than what's allowed in your state.
• Operate outside the jurisdiction of U.S. authorities making it difficult to take any action against wrongdoing.

More info: How Do I Find Out if My Payday Lender is Licensed in my State?

How Does the Payday Loan Repayment Work?

The way you repay your payday loan will depend on your lender and how you applied for and received your loan. If you go to a storefront payday loan location, the lender will probably give you one of two options to repay your loan:

Post-dated check

To repay your loan this way, the lender will require a physical check from your bank that is addressed to them, made out for the full balance due and dated for your next pay date.^[5]

If you don't pay off your loan prior to the date on your check, the lender will deposit it into their bank and the funds will be debited from your checking account. If there are not enough funds in your account to cover the loan repayment, your bank will likely charge you a returned check fee and you will incur late payment charges from your lender.^[6]

ACH

If you're repaying the loan via ACH (Automated Clearing House), the lender will ask for your checking account information (both routing and account numbers) and require you to sign a document giving them the authorization to debit your account for the loan balance plus fees on the date of your next paycheck.^[5][7]

If there aren't enough funds in your account to cover the loan repayment, you will likely receive an NSF fee from your bank as well as incur late payment charges from your lender. Depending on your state, your lender could continue to try debiting your account until they receive payment. This will likely result in additional NSF charges.^[6]

See also: How to Repay My Payday Loan?

Does Paying Back a Payday Loan Improve My Credit?

Unfortunately, probably not. While your credit score is partially calculated based on your payment history, most payday lenders don't report on-time payments to the credit bureaus. So, while paying back your loan on time will ensure you're not charged additional fees, it's unlikely to improve your score.

But a late payment can, and probably will, lower your score. This is because, while payday lenders typically don't report on-time loan prepayment to the credit bureaus, they might report a late payment. In addition, if they try to obtain repayment and are unsuccessful, they might sell your loan to a collection agency. Almost all collection agencies will report your delinquency to the credit bureaus.^[8]

Learn more: Do Payday Loans Help Rebuild Your Credit or Improve Your Credit Score?

What If I Can't Repay a Payday Loan?

While it's important to try to pay it on time, if that's not possible, you have options. Many states provide protections for consumers by allowing them to roll over or renew their loan or to pay it off in installments (which might be more manageable than paying the entire balance at once). The states that allow borrowers reprieve in the event they can't pay their loan are:^[4]

• Alabama
• Alaska
• California
• Connecticut
• Delaware
• Florida
• Hawaii
• Idaho
• Illinois
• Iowa
• Kentucky
• Louisiana
• Michigan
• Minnesota
• Montana
• Nebraska
• Nevada
• New Mexico
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Rhode Island
• South Carolina
• South Dakota
• Texas
• Utah
• Virginia
• Washington
• Wisconsin

Here's what you can do when you're unlikely to pay back a payday loan.

What Does It Mean to Renew or Roll Over a Payday Loan?

If a borrower can't pay their payday loan on its due date, the states above allow some reprieve. One of those options is to renew or roll over your loan.

These two terms are used interchangeably and mean that if you can't pay your loan balance in full on the date it's due, you have the option to pay just the fees that are associated with the loan and delay paying the principal balance until the next 14 or 30 day period is over. On the next due date you will owe the principal balance plus another set of fees and/or interest charges.

In lieu of loan renewals or rollovers, some states require payday lenders to allow borrowers to pay their balance over time without incurring additional fees or penalties.

Check out: What Does Renewing Or Rolling Over a Payday Loan Mean?

The Bottom Line

Payday loans are one way to get a short-term loan when you have immediate cash needs. They're regulated on a state-by-state basis. So it's important to check in with your state regulators to not only ensure your lender is licensed in your state, but also to educate yourself on the consumer-protection laws that will dictate the terms of your loan, your relationship with the lender and how your loan is repaid.

References

1. What is the Military Lending Act and what are my rights? - Consumer Financial Protection Bureau
2. Legal Status of Payday Loans by State - Payday Loan Information for Consumers
3. How Well Does Your State Protect Payday Loan Borrowers? - The Pew Charitable Trusts
4. Payday Lending State Statutes - National Conference of State Legislatures
5. How do I repay a payday loan? - Consumer Financial Protection Bureau
6. Why did my payday lender charge me an NSF fee? - Consumer Financial Protection Bureau
7. What is "ACH authorization" - Consumer Financial Protection Bureau
8. What Happens if I Default on a Payday Loan? - Experian

More Common Questions About Payday Loans

• Are Payday Loans Covered Under the Military Lending Act?
• How Do Payday Loans Compare To Deposit Advances?
• Is It a Good Idea To Take out a Payday Loan If I Need Money Now?
• Can My Payday Lender Garnish My Wages Or Bank Account?
• Should I Sign an "ACH Authorization" When Repaying My Payday Loan?
• What Rights Do I Have Under the Military Lending Act When Getting a Payday Loan?
• Why Did I Get Charged a Late or Non-Sufficient Funds (NSF) Fee by My Payday Lender?
• Should Payday Lenders Follow U.S. Federal Laws, Even If They Claim To Be Located in Other Countries?