Payday Loans in California: Are They Legal and How Do They Work?

Payday lenders often advertise “fast cash” with few prerequisites, so cash-strapped California residents might understandably consider a payday loan when under financial duress. 

But these small-dollar, short-term loans don’t come cheap, even though the Golden State regulates them. Per The Pew Charitable Trusts, California payday lenders charge, on average, a 361% annual percentage rate (APR) on a $255 loan. 

In this guide, we’ll break down California’s payday lending laws, so its residents can better understand their rights and emergency funding alternatives.

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Are payday loans legal in California?

Payday loans are legal in California under the state's Deferred Deposit Transaction Law (CDDTL). However, this law restricts them by:

• Preventing lenders from lending against checks that exceed $300

• Capping fees at 15% of the check's face amount. Note: If a lender deducts the maximum fee ($45) on the maximum loan ($300), you’re technically left with $255.  

• Setting a maximum loan term of 31 days

• Prohibiting lenders from charging for extensions or issuing a new payday loan so a borrower can repay the old one  

• Limiting lenders to a single charge of $15 for returned payments, should the borrower’s check bounce

• Preventing lenders from charging fees for late payments

Like most states, California requires payday lenders to hold a license — in this case, from the California Department of Financial Protection and Innovation (DFPI). If a provider, including an online lender, is unlicensed or offering payday loans that violate state limits, they might be operating illegally.

How payday loans work in California 

California’s payday lending laws define deferred deposit transactions (an interchangeable term for payday loans) as cash advances backed by a post-dated check. However, they don’t explicitly ban electronic repayment methods, such as ACH debits, and some state lenders offer these methods as a way to secure your loan. (They can’t make preauthorized electronic fund transfers a borrowing requirement, however, thanks to federal law.)   

Taking out a payday loan in California typically works like so:

• You apply online, by phone, or in person. Most payday lenders require you to be at least 18, have a government-issued ID, proof of income, and an active checking account.

• You receive a loan agreement. Lenders must disclose the total amount of any fees in dollars and APR, plus your loan’s due date. They must also obtain written authorization if they plan to collect debts electronically. 

• You sign and receive your funds, usually in cash, direct deposit or on a preloaded debit card. 

• You repay on or before the due date, typically your next payday. The lender deposits your check or debits your bank account. You may also repay in cash in person before the due date, which cancels the check.

The risks and dangers of payday loans

Payday loans are traditionally defined as small-dollar, high-cost loans with triple-digit APRs and notably tight single repayment windows. 

They’ve become widely associated with debt traps, as their lack of credit requirements and “fast cash” promises tend to attract low-credit borrowers already under serious financial strain.   

California has some guardrails to protect against the dangers of payday loans, but they’re certainly not foolproof. Golden State borrowers should watch for these risks:

• High costs: A $45 fee on a two-week, $255 loan amounts to a 460% APR. That's over 20 times the average credit card APR of 21%.

• Short repayment windows: California law sets a maximum loan term (31 days), but not a minimum. As a result, these payday loans are typically due in 2 to 4 weeks (the industry standard).

• Overuse: In 2023, California payday lenders charged $236.9 million in fees, with 73.6% of those fees coming from borrowers who made seven or more transactions, according to the DFPI.

• Banking issues: California limits payday lenders to a single NSF fee, but it doesn’t explicitly ban multiple collection attempts and each one could result in costly bank fees and even an account closure.   

Defaulting on a loan could lead to persistent debt collection efforts, civil suits, judgments, garnishment and long-term credit and financial consequences.

How to avoid the payday loan trap

You might be able to avoid California payday loans and their associated traps with these steps:

• Open a bank account: Research suggests people without bank accounts are disproportionately likely to use payday lenders. Bank On California, part of the nationwide Bank On initiative, helps un- or underbanked residents find and open low-cost, no-overdraft checking accounts.

• Automate savings by setting up regular rollovers from your checking to savings account through your banking app. Even $5 per paycheck can build a buffer over time. 

• Claim the California Earned Income Tax Credit (CalEITC): Eligible families earning up to $32,900 per year could qualify for up to $3,756 cash back or a reduction in the tax they owe. That money could help jumpstart your emergency savings. 

When a payday loan might be the only option

Unfortunately, there are times when the cost of not borrowing might outweigh the cost of borrowing, especially in disaster-prone California, where the cost of living is high. (Say you need to evacuate your home during a wildfire or you blow a tire and need to get to work.)  

In these instances, if you can’t qualify for traditional credit or find an alternate source of funding, you might have to turn to a payday loan.

• Know your rights. In addition to fee restrictions, California prohibits criminal prosecution of payday loan borrowers who can’t repay.

• Verify your lender is licensed using the DFPI licensee website. Unlicensed lenders are likely operating illegally and their loans may be unenforceable.

• Ask about extended repayment plans (EPPs) before selecting a lender. California doesn’t require its payday lenders to offer these (which buy you more time to pay off the debt, usually in installments), but many do. Because the state prohibits lenders from charging for EPPs, it may be helpful to choose one that has them.

Safer alternatives to payday loans

You can also avoid California payday loans by understanding your alternatives. 

Credit cards

Most credit cards offer 21-day grace periods that let you pay off purchases without interest. They also offer cash advances, though these cost a transaction fee (usually 3% to 5%), charge a higher APR (around 29.99%), and start accruing interest right away. 

Still, they can be cheaper than payday loans. A $255 credit card cash advance with a 29.99% APR and 5% transaction fee costs roughly $16 over two weeks. The same $255 California payday loan costs $45 in fees alone. 

Earned wage access

If poor credit is an issue, Earned Wage Access products might be a viable solution. These products offer early access to wages you’ve earned between paychecks, generally with no credit check. They also often cost less than payday loans or credit card cash advances. 

Instacash, an EWA product from MoneyLion, offers access to up to $500 of earned wages within 1 to 5 business days. No interest. No mandatory fees. 

Personal loans (banks or credit unions)

Personal loans typically carry lower APRs (8% to 36%) and more flexible loan terms than payday loans. The catch is that they often require good credit and full underwriting.

However, local banks or credit unions might lend to borrowers who appear riskier on paper if they have a longstanding good relationship. 

Payday alternative loans (PALs)

Another option, if your lack of credit is a core issue, PALs offered by credit unions mimic traditional payday loans in structure and accessibility (they generally skip a credit check), while offering much more consumer-friendly terms.  

For example, Downey Federal Credit Union in California offers PALs between $200 to $2,000 with APRs as low as 18% and maximum loan terms of 12 months. 

PAL APRs are capped by the National Credit Union Administration (NCUA) at 28%. 

Credit-builder loans

While credit-builder loans won’t help with a current cash shortage, they could help you prepare for a future one by forcing savings and building credit.

Typical credit-builder loans involve “borrowing” $300 to $1,000 that’s held by a bank in a savings account. They require $25 to $50 payments across a 12- to 24-month repayment period, at the end of which, you receive access to your savings.

You can explore credit-builder loans with a MoneyLion Credit Builder Plus membership. 

California-specific assistance programs

State benefit programs help residents in financial hardship cover essential expenses. California programs include:

• California Work Opportunity and Responsibility to Kids (CalWORKs) provides monthly cash assistance for rent, food, utilities and other essentials for up to 60 months to eligible families with children.

• California Alternate Rates for Energy (CARE) provides a 30% to 35% discount on electricity bills and 20% off gas bills for qualified households.

• Emergency Rental Assistance Programs (ERAPs) vary by county or municipality. Los Angeles County's program, for example, covers up to six months of unpaid rent, with a maximum award of $15,000 per unit, for eligible households.

You can identify local rental assistance and other benefit programs via California's 211 network.

Borrowing from family and friends

This method could help you avoid fees, interest and credit inquiries that ultimately lead to a loan denial. 

However, it’s a good idea to take steps to preserve your relationship. These steps include borrowing only what you need, making your intention to repay clear (even if the loved one offers to give you the money) and drafting a formal loan agreement.

Side hustles

You can earn extra income to weather a current or future cash shortage through gig work. Popular side hustles in California include ridesharing or food delivery in big cities like Los Angeles or San Francisco, contract production jobs in entertainment industry hubs and freelance coding gigs in Silicon Valley.

Conclusion

Payday loans in California remain legal — and widely used, despite charging pricey APRs for a small amount of cash. Fortunately, they’re no longer the sole option for borrowers with bad credit. PALs and EWA products don’t require credit checks for low-fee cash advances, and state assistance programs could help you avoid borrowing to cover everyday expenses. You might also qualify for a small personal loan for bad credit.  

FAQs

What is the maximum loan amount I can borrow in California?

California caps payday loans at a maximum check amount of $300, with fees capped at $45. That means you can effectively borrow $255. The state also prohibits you from holding more than one payday loan at a time.

What fees and interest rates can payday lenders charge in California?

California payday lenders can charge a fee of up to 15% of a check's face value. Under state law, these checks can’t exceed $300, so the maximum fee is effectively $45. California has a 36% APR cap on personal loans of $2,500 or more, but it doesn’t apply to deferred deposit transactions.

How long do payday loans last?

California payday loans have a maximum term of 31 days, with no minimum term requirements. As a result, most payday loans in the state follow standard repayment terms of two to four weeks. 

Will a payday loan affect my credit score?

Payday loans rarely improve your credit score, as payday lenders aren’t in the habit of reporting payments to the credit reporting agencies. They can, however, hurt your credit score if the lender does report a default, the debt goes to collections, or someone sues to recoup the balance and secures a judgment against you.

Can I get a payday loan with bad credit?

Most California payday lenders don’t conduct traditional credit checks. They typically verify income and confirm you don't have an outstanding loan. However, given California's high payday loan APRs, you might want to consider payday loan alternatives. 

What should I do if I can’t repay my payday loan on time?

If you can’t repay a payday loan, it’s worth contacting your lender. California doesn’t mandate that lenders offer an extended payment plan, but about 40% do, and state law prohibits them from charging a fee for one.

Sources

• Pew.org - Payday Loans Cost 4 Times More in States With Few Consumer Protections

• Leginfo.legislature.ca.gov - Deferred Deposit Transaction Law

• Dfpi.ca.gov - California Department of Financial Protection and Innovation Website

• Dfpi.ca.gov - Annual Report of Payday Lending Activity 

• Fdic.gov - 2023 FDIC National Survey of Unbanked and Underbanked Households

• Joinbankon.org - Banking Website

• Ftb.ca.gov - CalEITC

• downeyfcu.org - Credit Union Website

• Consumerfinance.gov - Consumer Use of State Payday Loan Extended Payment Plans Report