Credible takeaways
- Payday loans can have sky-high APRs, depending on the state you live in and the fees charged.
- Many states have banned payday loans.
- The maximum amount you can typically borrow with a payday loan is $500.
- Payday alternative loans, cash advance apps, and family loans can be much cheaper.
Payday loans are usually easy to get, since they don’t require a credit check. This could make them seem like an attractive option for fast cash if you have bad credit. But there may be better (read: cheaper) ways to get money just as easily.
To start, payday loans aren’t available in all states, and where they are available, they’re expensive — especially if you can’t pay them back with your next paycheck. Some states also have few safeguards in place, which can send payday loan annual percentage rates (APRs) over 600%.
Only consider payday loans as a last resort. If you feel like you’ve reached that point, first learn what you can about how payday loans work and their alternatives.
What are payday loans?
Payday loans are short-term loans that are generally due within two weeks, or by your next payday. These loans are available at physical payday stores and online. Maximum payday loan amounts vary by state and your income, but usually max out around $500.
Instead of paying an interest rate, you’ll generally be charged a fee based on the loan amount, such as $10 to $30 for every $100 you borrow. It’s the fees plus the very short repayment period that make payday loans so expensive.
Learn More: What Are Payday Loans?
Note
Multiple states, such as Arizona and Hawaii, have outlawed payday loans in an effort to protect consumers from predatory lending practices.
How do payday loans work?
When you apply for a payday loan, you generally provide the lender with proof of your income, but aren’t required to undergo a credit check. (Some online payday loan lenders do check your credit, however.) To repay the loan, you might write a post-dated check for the loan amount, including fees, or otherwise give the lender authority to access your bank account.
Some payday loan companies allow you to renew or roll over the loan if you can’t afford to repay it — for a fee — which can further increase your overall borrowing costs.
Related: How Do Payday Loans Work?
Why are payday loans bad?
Payday loans are bad because they’re expensive, can lead to a debt cycle that’s hard to escape, and generally aren't reported to the credit bureaus (unless your debt goes to collections).
Payday loan APRs
Payday loans are typically much more expensive than personal loans and credit cards. While payday loans have APRs in the triple digits, personal loan rates typically top out around 36%, while credit cards may top out around 30%. (There are some installment loan lenders for bad credit specifically that have APRs over 100%.)
- Payday loan APR example: If you took out a two-week, $400 payday loan with a $80 fee ($20 per $100 borrowed), your total borrowing costs would be $480. That translates to an APR of 521.43%.
Related:
Payday loan rollover fees
Renewing your payday loan is usually an option if you can't repay on time. But it can add significant cost to an already expensive loan. For example, if you renew a $400, two-week payday loan that had a $40 fee, the lender may charge you an additional $40 fee. If you keep renewing the loan, you could end up paying more in fees than your original loan amount.
Important
If you need to roll over a payday loan, ask the lender if it offers a no-cost extended payment plan. In most states, payday loan companies are required to offer this option (but not required to advertise it).
Payments not reported to credit bureaus
Payday loan lenders don’t usually report payments to the three major credit agencies — Equifax, Experian, and TransUnion. As a result, making your payments on time likely won’t help you improve your credit.
But if you default on the loan and it's sent to collections, your late payments might be reported to the credit bureaus, which could further damage your credit.
Payday loan alternatives (even if you have bad credit)
Before applying for a payday loan, consider a cheaper alternative in order to save money. Here are a few options.
Payday alternative loans (PALs)
Some federal credit unions offer PALs, which are available up to $2,000 with a maximum 12-month repayment period, depending on the type of PAL. But you can also get lower loan amounts and repayment terms as short as one month. The maximum APR that a federal credit union can charge for a PAL is 28%, making them a much more affordable option than a payday loan.
Learn More: What Is a Payday Alternative Loan?
Personal loans
Personal loans are fixed-rate monthly installment loans offered by banks, credit unions, and online lenders. These loans are much cheaper than payday loans — as noted, APRs for traditional personal loans don’t generally exceed 36%.
The exact rate you receive if you qualify varies, depending on factors like your income, credit score, and how much debt you have. A lender’s lowest advertised rate is typically reserved for borrowers with an excellent credit profile.
Some lenders have low or no minimum credit requirements, so it may be possible to qualify for a personal loan with bad credit. Bad credit generally means a FICO score below 580.
Related:
Cash advance apps
Cash advance apps like EarnIn, Dave, or MoneyLion may be a good alternative to a payday loan, especially if you don’t pay an extra fee to have the money sent the same day. Cash advance apps don’t generally consider your credit profile, but do want to see that you have a regular source of income. Some charge subscription fees, most charge fees to deliver money the same day you request it, and some solicit optional tips.
To keep costs down, avoid express funding fees and optional tips.
Check Out: Payday Loans vs. Cash Advances
Family loans
A family member or friend may be willing to give you a short-term, interest-free or low-interest loan. Be sure to discuss the terms of the loan, including the frequency, start date, and amount of payments, and put them in writing. Repay the loan on time to avoid causing a potential rift in your relationship.
Credit card cash advance
If you have a credit card that isn’t maxed out, you may be able to take out a cash advance. Credit card cash advances can put money directly in your bank account or in your pocket via an ATM. But interest is charged on them immediately (without a grace period like regular credit card purchases), and the APR is generally much higher than your regular purchase APR. Still, a credit card cash advance may be a much better option than a payday loan, as APRs are likely to be around 30%.
Note
Credit card cash advances may also charge a fee such as $5 or 5% of the amount advanced, whichever is greater.
0% APR credit card or balance transfer
If you don’t have good (or better) credit (a FICO score above 670), you may not qualify for a new credit card with a 0% promotional APR. But you may have a 0% APR balance transfer offer on an existing card.
While this can’t get you a short-term loan directly, you could transfer one or more high-interest credit card balances and free up funds that would otherwise go to minimum payments. (You’d still need to make minimum payments with a balance transfer, but the payments should be smaller since they would be based on a 0% APR.)
Just note that you’ll typically be charged a balance transfer fee of 3% to 5%, and would ideally pay down the bulk of the amount you transfer before the promotional period expires. Otherwise, you'd be stuck paying the regular APR on the remaining balance.
Check Out: Personal Loan vs. 0% APR Credit Card
401(k) loan
While it’s generally not advisable to borrow from your retirement account, sometimes it can make sense. If your plan administrator offers 401(k) loans, and you have a vested balance, you should be eligible — there are no credit check or minimum income requirements to take a loan from your 401(k). Plus, interest rates will be lower than you’re likely to see anywhere else with bad credit. And, the interest you pay goes back into your own account.
That said, there are still risks to these loans. First, you give up potential growth on the funds had you left them invested. Second, if you can’t repay the loan, it may be treated as a taxable distribution, on which you’ll pay income tax plus a 10% penalty tax if you were under 59 ½ when you took out the loan. Third, if you quit or lose your job, the loan could become due immediately.
Check Out: Personal Loan vs. 401(k) Loan
Important
Retirement plan balances are often protected during bankruptcy — if you think you might file bankruptcy, you may not want to disturb your 401(k).
Financial assistance programs
If you’re struggling to pay your utility bills or rent, you may qualify for financial assistance, such as the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF). Contact your local library, dial 211, or visit 211.org to get help finding programs in your area.
FAQ
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