When you need money quickly, a payday loan may seem like a good idea. After all, they're easy to get, quick, and usually don't require a credit check. But payday loans can be very expensive, often with triple-digit annual percentage rates (APRs). Because they can be difficult to pay off in full by the due date, they're notorious for trapping borrowers in a costly cycle of debt.
It’s best to compare alternatives, such as a personal loan, to see if you're eligible. Average personal loan rates for poor credit were 30.25% in November 2023, according to Credible data.
Common payday loan requirements
Lenders may have different requirements to qualify for their specific loans, but you should generally meet the following:
- Be 18 or older: Payday lenders will not lend to someone younger than 18 years old.
- Have a valid ID: You’ll need an up-to-date government ID, such as a driver’s license or passport.
- Have proof of income: A pay stub or other method of verification of income from a job or another source, such as a Social Security payment, is generally necessary.
- Have an active account with a bank, credit union, or a prepaid card: Payday lenders can withdraw the full amount due from your bank, prepaid card, or credit union account (with your authorization) on your next payday. Alternatively, you can write a post-dated check with fees included.
State regulations affecting payday loans
Because of the payday loan industry’s (well-deserved) reputation for predatory lending practices, 26 states have regulated them in various ways, commonly focusing on loan terms, maximum loan amounts, and the amount companies can charge in fees or interest. Sixteen of the 26 states require payday lenders to offer borrowers no-cost extended payment plans, and some states have prohibited payday loans altogether.
The details can vary dramatically. For example, Idaho’s $1,000 maximum loan limit is more than three times the limit in California, while some states — like Washington — tie the maximum loan amount to the borrower’s income.
Here’s a look at how three states regulate the payday lending industry:
Data via the National Conference of State Legislatures and Pew Charitable Trusts.
What to consider before applying for a payday loan
Before you take out a payday loan, it’s wise to think through the implications. Here are some of the major factors to consider:
- The total cost of borrowing: Payday loans are one of the most expensive ways to borrow money. A typical payday loan with a term of two weeks and a fee structure of $15 per $100 borrowed adds up to an APR of nearly 400%. Compared to other borrowing options, such as credit cards, this is extremely high. Credit cards, which typically have high APRs already, generally range up to 30% APR.
- Your repayment schedule: Payday loans must be repaid in full from your next paycheck, and that extremely short repayment term can be challenging. Let’s say you take out a $500 payday loan with the terms listed above — on your next payday, you can expect to have $575 pulled out of your bank account. If money has been tight, you may be forced to roll over the loan, which can lead to further fees.
- The cost of rolling over your loan: Many states are required to offer no-cost extended repayment plans for payday loans, but the Consumer Financial Protection Bureau found that borrowers continue to pay expensive rollover fees, regardless, which keep them in a cycle of costly debt. On an average $300 payday loan, you could pay $45 every two weeks to roll over the loan until you could pay off the balance. If you kept doing this for four months, you’d pay $360 in fees without paying back any of the original $300 you owe.
Check Out: Best Emergency Loans for Poor Credit
Personal loans vs. payday loans
Personal loans are another option when you have surprise expenses, and they offer lower borrowing costs on average than payday loans, as well as longer repayment terms. While payday loans may top out at $500, depending on your state, and must be paid back within two to four weeks, personal loans offer a range of loan amounts, from $600 to over $50,000, and repayment terms generally extend from one to seven years.
Learn More: Are Payday Loans Safe?
Tip
Longer terms make repayment more doable, as you will make multiple smaller payments over time, compared to one large payment with possible rollovers.
For example: Let’s compare a small personal loan to a payday loan. First of all, the cost of borrowing is very different. The average interest rate on a payday loan — if paid back on time — is 391%, according to the Federal Reserve Bank of St. Louis. In contrast, the average interest rate on a 24-month personal loan from a bank is 12.33%, according to Fed data.
If you borrowed $500 from a payday lender with a 15% finance charge and a term of two weeks, you’d owe $575 on your next payday. That fits pretty closely to the average rate of 391%.
But don’t forget if you can’t make that payment on time, you may be offered a rollover, which could add $75 to what you owe every two weeks. That’s roughly $150 a month to continually re-borrow the same $500 as long as you can’t repay the loan in full.
On the other hand, let’s say you take out a $600 personal loan at a 30% APR (because, let's also say, you have poor credit). This loan has a 12-month repayment period. Your payment is only $58 per month and the loan would be paid off in one year.
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
Payday loan alternatives
There are other ways to get money when you need it. Here are some of the most common:
- Personal loans: As discussed above, personal loans can offer a flexible and less expensive option for borrowers. Some lenders offer same-day funding, making them almost as speedy as payday lenders.
- Credit cards: Credit cards, on average, carry higher interest rates than personal loans, but are still less expensive than payday loans and offer more flexible repayment terms.
- Home equity: If you have equity in your home, a home equity loan or a home equity line of credit may be a good option. But remember, these loans are secured by your home, meaning you could lose it if you default.
- Payday alternative loans: Some federal credit unions offer payday alternative loans (PALs) that are designed for bad-credit borrowers, but cap APRs at 28%. Depending on the type of PAL, they can offer repayment terms up to one year and loan amounts up to $2,000.
FAQ
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