The essentials
What is a payday loan?
Payday loans are generally $500 or less and due when the borrower receives the next paycheck or other income. The lender may take a post-dated check or electronic authorization. Product names vary, and an online lender still must comply with applicable law.
The central risk is reborrowing. If the full balance cannot be paid while covering rent, food, transportation and utilities, renewal or a new loan can add another fee without solving the underlying shortage. Compare the dollar fee and APR, and ask about extended payment plans before the due date.
How it works
- 01
The borrower provides income, identification and account information.
- 02
The lender advances a small principal and charges a finance fee.
- 03
The full balance is due on the agreed date unless a lawful installment structure applies.
- 04
Failure to repay can trigger bank fees, collection and repeated withdrawal attempts subject to law.
When it can—and cannot—make sense
Potentially useful when
- Only after lower-cost alternatives have been checked.
- The exact repayment source is certain and does not require another loan.
- The lender is licensed where required.
- The borrower understands any repayment-plan right.
Pause when
- Repayment would consume money needed for essential bills.
- The lender is unlicensed or will not identify its legal name and location.
- The agreement uses repeated refinancing as the expected path.
- The lender threatens arrest for nonpayment.
Costs and risks to count
- Finance fee per $100 borrowed
- APR produced by the short term
- Rollover or renewal fee where lawful
- NSF or overdraft fee from the financial institution
- Late or returned-payment charge where allowed
The CFPB Payday Lending Rule restricts repeated failed payment-transfer attempts for covered loans and requires notices. The Military Lending Act generally caps MAPR at 36% for covered servicemembers and dependents and prohibits certain terms.
Questions to ask before signing
Is payday lending permitted in my state?
Is this lender licensed?
What exact dollar amount is due?
Is a no-cost extended payment plan available?
How do I revoke electronic payment authorization?
Location matters
Check the rules in your state
This is one of the most state-dependent products. States may prohibit the product, cap cost, limit principal, require databases, restrict loan frequency, ban rollovers, impose cooling-off periods or require installment plans.