Young woman on mobile phone asking for personal loan.

Payday Loans: Everything You Should Know

Matt Cardwell6 minute read
UPDATED: June 02, 2024


Those who work full-time jobs can typically expect a weekly or biweekly paycheck. Life can be unpredictable, though, and if an emergency comes up where you need cash fast, you may not be able to wait for that check to arrive.

This can be a common reason some people turn to payday loans for smaller, more immediate access to cash. There can be a lot of risks involved with this borrowing practice, though, and you could potentially see your financial situation worsen from it.

Rocket Loans℠ does not offer payday loans, yet we want to keep our readers informed on different loan options available. The following article will explain how payday loans work and why they can be risky to take on.

What Is A Payday Loan?

A payday loan is a short-term loan due to be repaid by your next “payday,” or when you receive your next paycheck or other source of income. As the loans are meant to be covered by a single paycheck, the loan amount will generally be smaller than other types of loans – usually $500 or less.

As stated above, payday loans are typically sought out by those who need cash fast, maybe for a utility bill, an expensive car repair or a medical emergency.

How Do Payday Loans Work?

Taking out a payday loan can entail a slightly different process from other loans.

You can find payday loans online through private lenders or at physical branches, and the application and approval process typically require the following:

  • You must have an active account with a bank or credit union. Prepaid card accounts are also accepted.
  • You must show valid personal identification, such as a driver’s license or other state-issued identification.
  • You must provide proof of your income from your employer or an alternative source.
  • You must be 18 years of age or older.

Payday loans, whether online or in-person, typically don’t require a credit check and may be granted with instant approval. While this may tempt borrowers with poor credit, the full costs and risks of payday loans can far outweigh this benefit.

Payday Loan Repayment

Some payday lenders require that a borrower write them a personal check for the loan amount, plus lending fees. The lender will then write the borrower a check for the loan amount, minus the fees, and then cash the borrower’s check on the loan’s specified due date. Others may just need permission to withdraw the owed amount from a borrower’s credit union or bank account.

Repayment for a payday loan is typically due 2 weeks from a borrower’s approval date in a lump sum. Some lenders may allow borrowers the option to renew or rollover their loans if they can’t repay the amount by the due date. In the event of a rollover, a borrower will only pay the lending fee on the loan, and get another 2 weeks to repay the full balance. The borrower is charged an additional lending fee for the extended date.

The Costs Of A Payday Loan

Payday loans typically don’t come cheap. Lending fees range from $10 – $30 for every $100 borrowed, and their annual percentage rate (APR) can run in the triple digits – 390% or more. Compare that to your average credit card with an APR of about 12% – 30%.

Consider a typical 2-week payday loan with a fee of $15 for every $100. According to the Consumer Financial Protection Bureau, the APR on that loan can equal about 400%. If you borrow $500, you’ll spend $75 in lending fees.

If you have to roll that loan over, you’ll be charged an additional $75, costing you $650 total.

It’s for this reason that many states stipulate a cap on a payday loan’s maximum loan amount, fees and interest rates, as well as other regulations. Check your state’s statutes on payday lending at the National Conference of State Legislature website.

The Risks Of Payday Loans

Borrowing a payday loan can be dangerous for your financial situation for a number of reasons. Here’s what you may risk when taking out a payday loan:

  • You spend more than you can afford. With such high lending fees and APRs, you’ll end up spending well more than the amount you originally needed. The additional charges for fees and interest could also potentially affect your ability to repay the loan on time.
  • You fail to repay the loan. If you don’t have enough money in your account when your lender goes to withdraw the amount, you could be charged a late fee and a returned payment fee. Additionally, your bank or credit union may charge an overdraft fee if they cover the cost of the loan for you. If your bank or credit union doesn’t cover the loan, they may charge you a non-sufficient funds (NSF), or “bounced check” fee, in addition to your lender charging a late and returned payment fee.
  • You can’t borrow the amount you need. Because of different state laws regarding payday loans, you may find yourself unable to borrow the amount you need if you live in a state with a lower lending cap.
  • You fall into a cycle of debt. While you may be able to roll your loan over multiple times, you’ll just continue to rack up lending fees every time you do so.
  • You can damage your credit score. Failing to make your monthly payments can significantly lower your credit score and make it tougher to get a loan or mortgage in the future. Making on-time payments won’t necessarily boost your score, either, as payday repayments aren’t typically reported to credit bureaus.

Alternatives To Payday Loans

Payday loans aren’t for everyone, especially with the dangers they can pose to a borrower’s finances. Check out some alternative loan options if you need money quickly.

Personal Loans

A personal loan works by providing a lump sum of cash you can borrow for various types of expenses. The application process for this kind of loan is relatively straightforward and will likely involve a credit check. If approved, you can expect to receive the money from your personal loan in 1 – 7 business days.

Unlike with payday loans, your interest and APR for a personal loan is dependent on your credit score – the higher your score, the lower your interest rate – and the rest of your credit profile. Current personal loan rates average at 6% – 36%, much lower than the triple digit rates for payday loans.

You may not have to wait a week for your personal loan to reach you, either. Some lending platforms, like Rocket Loans, offer same-day financing, so borrowers could see their money on the same day they’re approved.*

Cash Advance Credit Cards

Some credit cards may allow cash advances, which allow a cardholder to borrow money against their credit line for immediate cash. This can be done at a physical bank branch or any ATM. Cash advances don’t require any credit checks or applications, either, as the card itself speaks to a borrower’s creditworthiness.

However, cash advances typically come with service charges of about 3% – 5% of the amount borrowed, as well as transaction fees if you borrow from an ATM outside of your bank. A cash advance can also have a higher APR than a regular credit card purchase, and there’s no grace period before it starts accruing interest.

Emergency Funds

If you’ve built a healthy emergency fund, you can avoid interest rates and fees altogether by dipping into your savings. Make sure you’re not leaving the fund dry, though, and have enough for other potential emergencies.

Borrowing From Your Family Or Friends

If someone in your family or among your peers has the money to lend, you may consider asking them for some cash. This can be an uncomfortable ask for some people, though, and failure to repay the person can result in a ruined relationship.

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Final Thoughts

A payday loan may seem like a great option at first glance, but a short-term loan like that can do more harm than good. Fees and a high APR can cost you more than you have, and multiple rollovers could put you in a lengthy cycle of debt. With the potential risks to your finances and credit, you should consider all your options before looking into payday loans.

If you’re considering a personal loan as an option, you can apply for prequalification today with Rocket Loans and see what rates you qualify for.

*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.

Matt Cardwell

Matt Cardwell is Editor-in-Chief and leads the Rocket Publishing House at Rocket Mortgage. During his nearly 15 years with Rocket Mortgage, Matt has occupied a diverse array of Marketing leadership roles, including leading and growing the company’s early digital and internet marketing efforts; Vice President of Marketing; Director of Social Media and Director of Business Channel Strategy.