What Are Payday Loans, How Do They Work, and Where To Get One?

When you’re in a difficult financial situation, a borrowing option that is easy to qualify for may seem like the ideal solution. Payday loans are popular for the same reason. These are small-dollar, short-term loans that need to be repaid when you get your next paycheck.

While these loans may seem attractive, they can be extremely expensive. Read on to learn more about how payday loans work, how much they cost, and risks and benefits.  

What are Payday Loans?

A payday loan is a short-term, high-cost loan for a small amount, typically up to $500. These loans are easy to qualify for since most lenders only need proof of income, a valid form of photo identification, and banking details.

Payday loans are often attractive to those with bad credit since they’re easy to qualify for. However, their loan terms are extremely short, in that you will need to repay the amount you borrow as soon as you get your next paycheck. It’s for this reason they’re called “payday loans”.

How Do Payday Loans Work?

A payday lender will ask for your bank account and income information, at the time you apply. Once they verify it, you’ll get cash instantly at the store. You can also apply for an online payday loan for bad credit and get the funds transferred to your account electronically.

You’ll provide the lender a post-dated, signed check for the amount you will need to pay back, or you will grant your payday lender written permission to electronically withdraw (or “debit”) this money from your bank account on the due date. If you don’t repay the loan via other means before the due date, the lender will automatically withdraw the amount from your account on the day it is due. In some cases, it may be difficult to block payday loans from debiting your account if you don’t have the money to repay.

Top 5 Payday Loan Providers

We reviewed 15 payday lenders based on key factors such as geographic availability, loan amounts, borrowing costs, and customer reviews to pick our top five recommendations.

1. Viva Payday Loans

• Loan Amounts: $100 to $5,000
• APR: 5.99% to 35.99%

Viva Payday Loans is our top pick because of its comparatively low APR range, high loan amounts compared to other lenders, and its fast and efficient application process. You can qualify for a loan online within 15 minutes, regardless of your credit score.

2. Money Mart

• Loan Amounts: $50 to $500
• APR: 194.7% to 1042.9%

Money Mart is an online financial institution that offers check cashing and payday loans of up to $500. The amount you can borrow and the APR depends on the state where you reside. The lender is transparent, and the fees and loan terms are clearly specified on the website.

3. AmeriTrust Financial Services

• Loan Amounts: Up to $400
• APR: 260.71% to 782.14%

AmeriTrust is a Cleveland, Tennessee-based payday lender that offers payday loans, lines of credit, title loans, and other financial services. The lender’s online calculator can estimate your APR range based on the amount you want to borrow.

4. Check ‘n Go

• Loan Amounts: $100 to $865
• APR: 456% to 1520%

Check ‘n Go is based in Cincinnati, OH, and has been offering payday loans in 18 states since 1994. The lender has a relatively high maximum borrowing limit of $865, but loan amounts will depend on your state of residence.

5. Ace Cash Express

• Loan Amounts: $50 to $1,500
• APR: 662% (estimated)

Ace Cash Express offers in-store and online payday loans in eight states across the country. If you apply online, you can get funds in your account instantly. Depending on your location and whether you apply online, you may be able to borrow up to $1,500.

Risks and Benefits of Payday Loans

Payday loans can be quite risky if you’re not aware of how the fees and interest rates work. Once you’re in a cycle of debt, it can be difficult to climb out. Consider these risks and benefits to make an informed decision about whether you should borrow one.

Risks

• Payday loans are considered predatory loans.
• They can be extremely expensive, in terms of interest charges and loan fees.
• You can get trapped in a debt cycle, especially if you rollover a payday loan into another new payday loan.
• They don’t help you build credit.
• Your credit may be damaged, and you may face legal action if you don’t repay the loan.

Benefits

• They have very few qualification requirements.
• You can get a loan even with bad credit.
• They’re unsecured loans, so you don’t risk losing your assets if you can’t repay it by the due date.

How Much Do Payday Loans Cost?

Payday loans can be quite expensive, so it’s important to understand their costs and any fees you may have to pay.

Interest Rates

While most payday lenders advertise their cost of borrowing in terms of fees, they’re also required to disclose the loan’s annual percentage rate (APR) before you sign the loan agreement.

An APR is the best way to compare loans since the annualized rate you see includes the interest as well as the fees you may have to pay. On average, payday loans have an APR of 400% for a two-week loan. This means that the interest you’ll pay when taking out a payday loan for just 2-3 weeks is essentially equivalent to paying 400% interest on a loan with a one-year term.  This is obviously much higher than credit card APRs, by quite a substantial margin.

Many states have maximum caps for the amount of payday loan fees a lender can charge, so it’s important to check state-specific laws before you take out a loan.

Fees

You must also be wary of other fees that payday lenders may charge. For example, you’ll have to roll over the loan, usually for an additional fee, if you can’t repay the loan on the due date. If you continue to repeat this cycle a few times, you may quickly end up owing much more in interest and fees than the original loan’s principal.

Short-term loan companies, such as payday lenders, will also ask you to provide a postdated check when you apply for the loan. If you don’t have a sufficient balance in your account when your lender deposits your check, you may have to deal with overdraft fees and bounced check fees.

The lender may also charge a returned check or failed payment fee if your payment can’t be processed. All of these extra fees can add up quickly and make a bad financial situation worse.

How Much Can I Borrow?

How much you can borrow with a payday loan will depend on your state’s payday lending laws. In most states, the common loan limit is $500. 37 states have specific statutes that allow payday lending, and 11 jurisdictions don’t have any specific statutory provisions.  

How To Get a Payday Loan

If you’re familiar with how payday loans work and have decided to apply for one, you can either borrow the loan online or in-store. Here’s how the process usually works:

1. Check to see if there are any better alternatives you can apply for, such as personal loans, credit cards, or getting a loan from friends and family.
2. Compare payday loans from different lenders, in terms of the loan amounts, APRs, and additional fees.
3. Once you’ve short-listed a few lenders, check the company’s reviews on Trustpilot and the Better Business Bureau (BBB).
4. Check to see if there are any complaints about the lender on the Consumer Financial Protection Bureau’s (CFPB) complaint database.
5. Check if your state has any regulations related to payday loans.
6. Ensure your lender is licensed in your state, by going to their website and verifying this information.
7. Gather your documents, such as a valid, government-issued photo ID, your Social Security number, pay stubs, and your most-recent bank account statement. Fill out the loan application and submit your documents to apply for the loan.

Eligibility Requirements

Payday loans are attractive to a lot of borrowers facing financial problems because of the lax underwriting criteria. Here’s what you’ll generally need to get a payday loan:

• A bank account in good standing
• A valid, government-issued photo ID
• Steady source of income

Most notably, there are no credit score requirements to qualify for a payday loan. This is also one reason why loan funds are available so quickly.  

Payday Loan Alternatives 

If you’re strapped for cash, there are several alternatives you may want to consider before you apply for a payday loan:

• Cash Advance App: Cash advance apps like SoloFunds, Dave, and Earnin allow you to borrow low-fee or interest-free paycheck loan types of advances. These are good payday loan alternatives because the funds are also available quickly.
• Personal Loan: Personal loans, even when you have bad credit, are available at a much lower APR compared to payday loans. Borrowing a loan from an online lender like a finance company or credit union is sometimes easier compared to the traditional banks, if you don’t have good credit.
• Buy Now Pay Later: If you need money for a large purchase, you can use buy now pay later (BNPL) apps like Klarna and Affirm to split the payments, often for no fees or interest.
• Loan(s) From Friends or Family: If you’re in a tough spot, a friend or family member may be able to help you out with a small loan without a credit check and often at no or low interest.

Borrow Payday Loans Sparingly to Avoid Debt Traps

Payday loans can help you pay for emergency expenses or cover your bills until you get your next paycheck. They can also be easy to qualify for, which is attractive for bad credit borrowers. However, these loans come with very high interest rates and finance charges.

Consider other alternatives like traditional unsecured personal loans before you borrow a payday loan. If you must, borrow them sparingly and have a plan in place for how you’ll repay them. It’s easy to get trapped in a debt cycle if you can’t repay the loan on your next payday.

If you’ve already accumulated a lot of debt, we recommend looking into payday loan debt solutions like credit counseling, debt consolidation, or debt settlement.