4 things to know about payday loans

Concerned man talking on the phone.Image: Concerned man talking on the phone.

In a Nutshell

Payday loans may provide quick infusions of cash that can help you make it to the next paycheck. But these loans come with high fees and interest rates, which could lead to “debt traps” for borrowers.
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Payday loans can seem like a lifesaver if you need cash quickly, but the high fees and short payment terms can lead to a cycle of debt.

While there’s no set definition of a payday loan, it’s commonly a short-term loan for a small amount, typically $500 or less, that’s typically due on your next payday, along with fees.

These loans may be marketed as a way to bridge the gap between paychecks or to help with an unexpected expense, but the Consumer Financial Protection Bureau says that payday loans can become “debt traps.”

Here’s why: Many borrowers can’t afford the loan and the fees, so they end up repeatedly paying even more fees to delay having to pay back the loan, “rolling over” or refinancing the debt until they end up paying more in fees than the amount they borrowed in the first place.

How payday loans work

Payday loans may go by different names — cash advance loans, deferred deposit loans, check advance loans or online payday loans — but they typically work in the same way.

To take out a payday loan, you may need to write a postdated check made out to the lender for the full amount, plus any fees. Or you may authorize the lender to electronically debit your checking account. The lender will then usually give you cash.

The loan is typically due by your next payday, generally in two to four weeks. If you don’t repay the loan plus finance charges by the due date, the lender can cash your check or electronically debit your bank account.

Many states that allow this type of lending set a cap on the loan amount and accompanying fees. Depending on the state, companies may be allowed to charge from $10 to $30 for every $100 borrowed.

What state regulations are in place for payday loans?

If you’re wondering what state laws are in place regulating payday loans where you live, keep in mind that some states prohibit payday loans.

And since there’s no set definition of what constitutes a payday loan, your state may allow for other types of short-term personal loans. If you’re wondering what restrictions are in place for what’s considered a “payday loan” where you live, take a look at this chart.

But keep in mind when reading this chart that the interest charged is not necessarily the same as an APR. For example, a 14-day loan at 10% interest translates to 260.71% APR.

State Finance charges Maximum loan amount Loan term
Alabama No more than 17.5% $500 10 to 31 days
Alaska An origination fee of $5. Finance charge that doesn’t exceed $15 or less for every $100 advanced, or 15% of the total advance, whichever is less. $500 Minimum 14 days
Arizona Payday loans are not legal in this state.
Arkansas Payday loans are not legal in this state.
California 15% of the face value of the check $300

Up to 30 days

Colorado Not to exceed 20% of the first $300 and an additional 7.5% for any amount in excess of that balance. $500 Minimum of 6 months
Connecticut Payday loans are not legal in this state.
Delaware No limit $1,000 Less than 60 days
Florida Fees can’t exceed 10%. $500 for the face value of the check 7 to 31 days
Georgia Payday loans are not legal in Georgia.
Hawaii Fees can’t exceed 15% of the face value of the check $600 No restrictions
Idaho No restrictions on fees 25% of the borrower’s gross monthly income or $1,000, whichever is less Maximum of 37 months for loans over $300
Maximum of 25 months for loans less than $300
Illinois No more than $15.50 for every $100 borrowed $1,000 or 25% of the borrower’s gross monthly income Minimum of 13 days
Indiana No more than 15% for less than $250; 13% for $250 to $400; 10% for $400 to $605 $605 Minimum of 14 days
Iowa No more than $15 on the first $100 borrowed and $10 for each subsequent $100 borrowed $500 Maximum of 31 days
Kansas No more than 15% $500 7 to 30 days
Kentucky No more than $15 per $100 borrowed $500 Maximum of 60 days
Louisiana No more than 16.75% $350 Maximum of 30 days
Maine $5 for loans less than $75; $15 for loans between $76 and $249; $25 for loans more than $250 or more $4,000 No restrictions
Maryland The state allows small loans subject to interest rate caps, which depend on the amount borrowed.
Massachusetts Small loans aren’t prohibited, but loans referred to as “payday loans” are. Small loans are capped at 23% and $6,000 or less.
Michigan No more than 15% for first $100 borrowed; 14% for second $100 borrowed; 13% for third $100 borrowed; 12% for fourth $100 borrowed; and 11% for fifth $100 borrowed $600 Maximum of 31 days
Minnesota No more than $5.50 for loans less than $50; $5 fee + 10% for loans between $50 and $100; 7% (minimum of $10) plus $5 fee for loans between $101 and $250; 6% (minimum of $17.50) plus $5 fee for loans more than $250 $350 Maximum of 30 days
Mississippi No more than $20 per $100 for loans less than $250; no more than $21.95 for loans between $250 and $500 $500 30 days
Missouri 75% $500 14 to 31 days
Montana No more than 36% $300 Maximum of 31 days
Nebraska Maximum of $15 per $100 borrowed $500 Maximum of 34 days
Nevada No restrictions 25% of expected gross monthly income 35 days
New Hampshire No more than 36% $500 7 to 30 days
New Jersey Payday loans are not legal in this state.
New Mexico While payday loans are not legal in this state, be careful when looking at your small loan options. New Mexico allows lenders to charge interest of up to 175% on small loans.
New York Payday loans are not legal in this state.
North Carolina Payday loans are not legal in this state.
North Dakota No more than 20% $500 Maximum of 60 days (including any renewal)
Ohio Interest is capped at 28%. But for loans less than 90 days, the monthly payment (including fees) can’t exceed 6% of the borrower’s gross monthly income or 7% of net monthly income. For loans greater than 90 days but less than one year, fees and interest can’t exceed 60% of the initial loan amount. $1,000 Up to one year
Oklahoma $15 for loans every $100 up to $300; $10 for every additional $100 $500 12 to 45 days
Oregon 36% (excluding origination fee of $10 per $100 borrowed or $30, whichever is less) $50,000 31 to 60 days
Pennsylvania Payday loans are not legal in Pennsylvania.
Rhode Island No more than 10% $500 Minimum of 13 days
South Dakota No more than 36% (including all fees) $500 No restrictions
South Carolina No more than 15% of the amount advanced $550 Maximum of 31 days
Tennessee No more than 15% of the amount advanced $500 Maximum of 31 days
Texas No restrictions No restrictions No restrictions
Utah Lenders can’t charge interest for longer than 10 weeks after the initial date of the loan. No restrictions Maximum of 10 weeks
Vermont Payday loans are not legal in this state.
Virginia No more than 36% plus a monthly service fee $2,000 Four to 24 months
Washington 15% for payday loans under $500; 10% for payday loans above $500 up to $700 $700 or 30% of gross monthly income, whichever is less Maximum of 45 days
West Virginia Payday loans are not legal in West Virginia, but small personal loans are. Personal loan lenders offering unsecured loans for $3,500 can’t charge more than 31% interest.
Wisconsin The maximum rate is 2.75% if not paid in full; otherwise there are no restrictions $1,500 (including fees and interest) or 35% of the borrower’s gross monthly income, whichever is less Maximum of 90 days
Wyoming No more than $30 or 20% per month on the principal balance None One calendar month

But while payday loans can provide much-needed emergency cash, there are dangers that you should be aware of.

1. High annual percentage rates

Say you get a two-week, $500 loan that charges $15 in fees for every $100 you borrow. Expressed as an annual percentage rate, that works out to an APR of almost 400%, according to the CFPB.

2. Short terms

You typically need to repay a payday loan within two to four weeks of the initial loan. Check your state’s regulations since policies differ.

3. Additional fees

If you can’t pay back the loan within the short amount of time, you may get hit with additional fees on top of the initial loan fee. Those fees start adding up if you roll the debt over, or re-borrow. The CFPB says nearly a quarter of initial payday loans are re-borrowed nine times or more.

Additional fees can include …

  • Nonsufficient funds charge, if you don’t have enough money available in your bank account when lenders try to cash your check or electronically withdraw from your account
  • Late fees or return-payment fees to the lender if you don’t repay on time
  • Rollover fees, charged on top of the original loan and initial fee to push back your loan’s due date

4. Won’t build credit

People with really rough credit may not have access to loans with better terms. But payday lenders usually don’t report your payment history to the credit bureaus, which means the loan doesn’t help you build credit.

Alternatives to payday loans

Though a payday loan can seem like a quick fix, there are other options that can help keep you out of a cycle of debt. Here are some alternatives.

Payday alternative loans

If you’re a member of a credit union — or if you can join one — you may be able to access lower-interest personal loans. Federal credit unions may also offer members payday alternative loans for amounts between $200 and $1,000. These typically come with terms up to six months, an application fee of no more than $20 and APRs of no more than 28%.

Paycheck advance

In some states, your employer can advance your paycheck with no fees added. It may be up to your company’s discretion, so ask your supervisor or someone in human resources about your options.

You also can try mobile apps like Earnin and Dave, which will advance you money in between paychecks if you meet certain requirements.

Debt settlement

A debt settlement may affect your credit but could help you resolve your debt and make a fresh start.

Personal loans

Personal loans may come with high interest rates as well, but if you need a loan and don’t qualify for lower rates, it’s important to do some comparison shopping. You may qualify for a slightly better rate and longer terms than the storefront payday lender is offering — but you won’t know unless you shop.

You should look for a loan with a lender who reports to the major credit bureaus. A positive history of on-time loan payments can help you build credit so you can eventually qualify for loans with better rates.

Credit counseling

Long term, you can also work on fixing the underlying financial problems that keep landing you at a payday loan counter. Try credit counseling, which could help you develop a budget, and work on starting a savings account.

What’s next?

If you’re looking for access to cash, payday loans may end up making your problems worse with high fees.

It’s a good idea to shop around and compare loan options, and consider long-term changes you can make to your finances that might make a difference. To start, you can try creating a budget and making a plan for paying off debt.

Hear from an expert

Q: What would you recommend for someone who needs a loan but has no credit?

A: In that case, they will need to provide sources of their income and the amount and other assets that can be used as collateral. Home title, car title can be used in lieu of no credit. 

Q: How can people in need of emergency loans find better alternatives?

A: In some cases, family members can help as well. Payday loans are OK, but since the interest rate they charge is rather large, those loans should be taken with that knowledge and repaid as fast as possible.

Dr. Miren Ivankovic, Adjunct Professor of Economics, Clemson University

About the author: Jamie Johnson is a Kansas City-based freelance writer who specializes in finance and business. She covers a variety of personal finance topics, including building credit, credit cards, personal loans and student loans… Read more.