How Do Payday Loans Work?

Payday loans are short-term loans that let you borrow a small amount, usually $100 to $500, and are due in full on your next payday.

Payday lenders typically don't have minimum credit score requirements, though they require proof of income. You'll pay a flat fee per $100 borrowed. Additional fees may apply if you can't repay the loan by your payday.

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How payday loans work — a step-by-step:

1. Apply with proof of income and a linked bank account.

2. Borrow a small amount, typically $100 to $500.

3. Agree to a flat fee per $100 borrowed.

4. Repay the full balance in one lump sum on your next payday.

5. If you can't repay on time, expect additional fees or rollover costs.

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What Do Payday Loans Cost?

Payday loan lenders typically charge between $10 to $30 for every $100 you borrow.

So if you need to borrow $300 and decide to go through a payday lender who charges $20 for every $100, you'd pay $360 total, assuming there aren't any other fees.

Why Are Payday Loan APRs So High?

While $60 as seen in the example above may not seem like that steep of a price to borrow money when you're in a pinch, payday loans are known for having extremely high APRs. APR refers to the annual interest rate you'll pay to borrow money, including any extra fees that are rolled in, and the average payday loan has an APR of about 391%, according to the Consumer Financial Protection Bureau.

Using the example above, a $60 fee amounts to 20% of the loan principal.

Here's how to calculate APR:

1. Divide 365 days by the 14-day loan term to get 26.07 two-week periods in one year. Two to four weeks is a typical payday loan term.

2. Multiply 26.07 by the 20% fee to get an estimated APR of 521.4%.

3. That's higher than the average payday loan APR, but within the range a payday lender may charge.

Since borrowers ideally repay payday loans in a matter of weeks, not months, APR isn't necessarily the perfect way to frame the interest rate required. But annualized or not, payday loan interest is uncommonly steep. With personal loans repaid in monthly installments, by contrast, the typical APR ranges between 6% and 36%.

Why Paying in a Lump Sum Makes Payday Loans Risky

More than the high APRs, what makes payday loans especially risky is that you're expected to repay the total amount you owe as one lump. Not only that, but you also have to make repayment by your next payday, so within two weeks or less.

If you're borrowing money because your budget is tight and you need some extra cash to cover an emergency expense, you might not be in a position to repay the full amount in such a short period. This could be especially true if you have several bills that are due around the same time, leaving you with little to no cushion in your bank account.

And payday lenders are quick to pile on the fees if you need to push the repayment back: You’ll usually be charged a rollover fee equal to the original loan fee.

So in that $300 loan example, rolling over the repayment would rack up another $60, bringing your total owed to $420. If you needed to roll over the repayment date again because you can't pay that entire balance in two weeks, that would be another $60.

Some payday loan borrowers even end up taking out another payday loan to cover the payment of their first payday loan, trapping them in a slippery cycle of debt with very high fees.

What Happens if You Can't Repay Your Payday Loan?

Here's a look at some solutions if you somehow can't pay back your payday loan before the deadline.

Can You Roll Over or Renew a Payday Loan?

Yes, lenders often do allow rollovers, but each time you roll it over, you're adding a new fee to the original charge. In other words, you're increasing the amount you pay in fees to borrow money.

The number of times you can renew, or roll over, a payday loan depends on your particular state. Some states won't allow rollovers at all, while others might allow renewals, extensions or refinancing, instead of a rollover in the traditional sense.

Your lender may also offer an extended repayment plan so you can repay the loan over time. These plans might reduce the need to charge any additional fees as well, but can give you a bit more breathing room to repay your balance.

Can a Payday Lender Withdraw Money From Your Bank Account?

When you apply for a payday loan, the lender often requests that you link your bank account. This allows the lender to verify that you have a regular source of income, but it also enables the lender to automatically withdraw money from your account when your paycheck hits. Importantly, you have to give the lender authorization -- it can't be done without your permission.

If you give a payday loan company permission to take money from your account when the loan is due and you don’t have enough funds, you could be charged overdraft or nonsufficient funds fees by your bank. If you haven't given the lender a heads-up that you can't repay in time, it will likely make multiple withdrawal attempts, racking up those extra fees each time.

If You Don't Want a Payday Lender To Debit Money From Your Bank Account

You'll need to provide a post-dated check that they can cash, or you might be required to return to the lender in person to make repayment. No matter what, the payday lender will want clear assurance that you'll repay the money, so if it turns out that you can't afford repayment by the original due date, you should contact them as soon as possible to discuss your options.

Can Payday Loans Go to Collections?

If you go long enough without repaying your loan, a payday lender can sell your debt to a third-party collections agency. This usually happens after repeated missed payments, though you'll definitely hear from the lender before the account does get sent to collections.

While payday lenders don't usually check your credit, your loan could still wind up in collections. If your payday loan does go to collections, this will appear on your credit report as a negative mark. If you apply for other loans or lines of credit, lenders will see this and are usually hesitant to approve your application. Even if you repay the debt, a payday loan that's been sent to collections can stay on your credit report for up to seven years under the Fair Credit Reporting Act.

When Does a Payday Loan Make Sense — and When Is It Risky?

A payday loan could make sense if, for example, you have a one-time emergency, need quick cash and are confident you can pay back the loan by your next payday.

Consider a payday loan if:

• You have a true emergency and need fast funds.

• You're low on cash and can't find another low-cost option.

• Your paycheck is coming soon.

• You can fully pay back the entire amount you've borrowed, plus fees, by your next payday.

Avoid a payday loan if:

• You're using it to pay your regular bills.

• You're carrying other types of high-interest debt or have another payday loan.

• You need to roll over, renew or borrow the loan again.

• You don't think you can repay the full amount by your next payday.

• You can find a less expensive option, such as a paycheck advance, credit union loan or another emergency assistance program.

If you can't repay on time, rollover fees may equal the amount of the original loan's fees, so your cost to borrow a payday loan doubles or even triples.

When a Payday Loan Doesn't Make Sense

If you have an ongoing income gap and are already struggling to pay existing bills, you might not be able to repay a payday loan in full within a few weeks. This is a good sign that you should steer clear of this option, since you’ll quickly rack up fees for renewing the loan.

Beyond the extra fees, if you need to take out an additional loan to pay off your existing one, you'll have to be cautious about your spending and ability to pay everything back. You don't want to fall into a cycle of debt from it.

Should You Get a Payday Loan? Ask Yourself These Questions

If you're considering a payday loan, ask yourself these four questions to weigh the pros and cons of payday loans and determine if they make sense for you:

• Do I have any other options for borrowing money?

• If not, can I reach out to a creditor or biller to negotiate a payment extension?

• Will I be able to pay the loan back by my next payday?

• Am I prepared to pay additional fees if I can’t repay the loan on time?

MoneyLion Split and Making Rent Payments Easier

It can be tough to make ends meet, but MoneyLion Split may offer a solution if you need assistance with paying rent. Split allows you to make two rent payments in one month.

You don't need to have a MoneyLion One membership. You simply put aside 50% of your monthly rent in a MoneyLion Split reserve account. Split funds your rent payment and you can use that to pay the rent to your landlord directly on the first of the month. Your landlord doesn't need to sign up for you to use the feature.

You can repay the funds later in the month. There's a 3% total fee for the two payments, so 1.5% of the total monthly rent on each payment.

Alternatives That May Cost Less

Before deciding on a payday loan, it's worth exploring these other options.

• Installment loans: These are personal loans that you repay in monthly installments, rather than one lump sum. The smaller payment amounts can be much more workable on a tight budget.

• Earned wage access: Earned wage access products like MoneyLion Instacash^® aren't loans. Rather, they let you access a portion of your already-earned wages before your next payday. You'll pay 0% interest, but the repayment period is generally pretty short.^*

• Payment extensions: If you're considering a payday loan to cover rent or a bill, you could reach out to your landlord or creditor to see if they’re willing to work with you on a repayment plan. This option could end up being cheaper and less stressful than taking on a payday loan.

• Credit union small-dollar loans: Many credit unions offer payday alternative loans (PALs). Like payday loans, they're short-term loans for small amounts, but their APR is capped much lower, at 28%.

What To Remember Before Taking Out a Payday Loan

A payday loan could make sense if you need quick access to cash, you don't have other borrowing options and you’re confident you can repay the amount by your next payday. The biggest risk factor is the lump-sum repayment, so if there's any uncertainty about whether you can cover the entire amount by the due date, you’ll want to explore all your other options first.

The best thing you can do is know exactly what you're agreeing to before signing a payday loan agreement or making any borrowing decision.

Key Terms

• Payday loan: A short-term, high-cost loan — usually $500 or less — that's due in full on your next payday. Lenders typically require proof of income and a linked bank account but don't typically run a credit check.

• Annual percentage rate (APR): The yearly cost of borrowing expressed as a percentage, including fees. Because payday loans carry flat fees on very short repayment terms, their APR averages around 391% — far above the typical 6% to 36% range for personal loans.

• Finance charge: The flat fee a payday lender charges per $100 borrowed, typically $10 to $30. This is how payday loan costs are structured rather than through a traditional interest rate.

• Rollover fee: A charge you pay to extend a payday loan's due date without reducing the principal you owe. Each rollover adds a new fee equal to the original, which can compound the total cost of the loan.

• Lump-sum repayment: Repaying the full loan balance — principal plus all fees — in a single payment, typically on your next payday, rather than in smaller installments over time.

• Payday alternative loan (PAL): A small-dollar loan offered by federal credit unions as a lower-cost alternative to payday loans. PAL I loans range from $200 to $1,000, with terms of one to six months. PAL II loans can be up to $2,000, with terms of one to 12 months, and have no minimum membership waiting period. Both types have a maximum 28% APR.

• Extended repayment plan: Some payday lenders offer this, allowing you to repay your loan in smaller installments over a longer period instead of one lump sum. Availability depends on state law and individual lenders.

Sources

• CFPB: What is a payday loan?

• CFPB: What does it mean to renew or roll over a payday loan?

• CFPB: What can I do if I can’t repay my payday loan?

• CFPB: How can I stop a payday lender from electronically taking money out of my bank or credit union account?

• CFPB: How do I repay a payday loan?

• CFPB: Can a payday lender garnish my bank account or my wages if I don't repay the loan?

• CFPB: What is a personal installment loan?

• MyCreditUnion.gov: Payday Alternative Loans

• National Credit Union Administration (NCUA): Permissible Loan Interest Rate Ceiling Extended

• CFPB: What do I need to qualify for a payday loan?

• National Conference of State Legislatures: Payday Lending State Statutes

• America's Credit Unions: Comparing PALs I and PALs II Loans

Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.