Payday Loans Explained: How They Work

Payday loans are short-term borrowing options designed to bridge a shortage in cash until your next payday. Because of their high costs and short repayment timelines, they may present increased risks for some consumers, particularly those already experiencing financial difficulty.

These loans are generally offered in small amounts and are structured to be repaid quickly, usually within a few weeks. Although the fee may seem small in dollar terms, it can result in an APR of several hundred percent, which can make payday loans a costly form of credit compared to other borrowing options.

Read on to learn how payday loans work, what they typically cost, and what to consider before taking one out.

Key points

• Payday loans are short-term, high-cost loans typically for $500 or less, due on the borrower's next payday, with lenders generally not checking a borrower's ability to repay.
• The cost of a payday loan can be significant, with fees typically ranging from $10 to $30 per $100 borrowed.
• Payday loan regulations vary by state, with some states prohibiting them entirely, others permitting them with no maximum loan amount, and most setting a borrowing limit, commonly $500.

What is a payday loan?

A payday loan is a short-term, high-cost loan typically for $500 or less that is usually due on the borrower's next payday. These loans generally carry a repayment term of two to four weeks from the date the loan is made, and lenders may not fully verify a borrower's ability to repay the loan while meeting their other financial obligations. Depending on your local state’s laws, payday loans may be available online or via storefront lenders. ^[1]

How do payday loans work?

The process of taking out a payday loan generally follows a few common steps, from application through to repayment. While specific terms can vary depending on state law and the lender, the core structure is similar across most payday loans. ^[1]

Applying for the loan

Payday loans are available through storefront lenders and online. Payday lenders generally do not perform a traditional credit check or assess whether the borrower can afford to repay the loan while meeting their other financial obligations.

Receiving the funds

Once approved, the loan amount can be provided in cash, by check, through an electronic deposit to the borrower's bank account, or loaded onto a prepaid card. ^[1]

Repaying the loan

Repayment is usually due in a single lump-sum payment on the borrower's next payday, typically within two to four weeks of the loan being issued. To secure repayment, borrowers generally provide either a post-dated check for the full amount owed, including fees, or written authorization for the lender to electronically withdraw the funds from their bank, credit union, or prepaid card account on the due date. ^[1] Because repayment is typically required in a single lump sum, some borrowers may find it difficult to repay the loan on time, which can lead to additional fees or the need to extend or refinance the loan.

Which states allow payday lending?

Payday loan laws vary widely by state, and the availability of these products depends on state regulations. In many states, traditional payday loans (short-term, lump-sum loans with very high fees) are restricted or no longer offered due to rate caps and other consumer protections.

States where traditional payday loans are not permitted

In some states, payday lending is effectively prohibited either through specific bans or strict interest rate caps under general lending laws:

• Arizona
• Arkansas
• Georgia
• North Carolina

In addition, some states do not have payday lending statutes and instead rely on broader consumer lending and usury laws that prevent these products from being offered:

• Connecticut
• Maryland
• Massachusetts
• New Jersey
• New York
• Pennsylvania
• Vermont
• West Virginia

In New York, for example, it is a felony under the state’s criminal usury law to charge interest above 25% per year. This rate is well below what payday lenders need to charge in order to operate. In New Jersey, payday lending is prohibited through its consumer lending framework, with the state attorney general actively pursuing lenders who try to target consumers in this state. ^[2]

States where payday lending has been reformed or restricted

In several states, small-dollar lending is allowed, but traditional payday loans are no longer viable due to interest rate caps (often around 36% APR), longer minimum loan terms, or other structural requirements. In these states, lenders typically offer installment-style loans instead:

• Colorado
• Illinois
• Montana
• Nebraska
• New Hampshire
• Oregon
• South Dakota
• Virginia
• New Mexico
• Hawaii also falls into this category, where traditional payday loans have been replaced by a regulated installment lending framework.

While small-dollar loans are available in many states, traditional payday loans are either prohibited or significantly restricted in a large portion of the U.S. These laws can change, so be sure to check your state’s current regulations to understand what types of credit products are available to you. ^[2]

How much can you borrow with a payday loan?

In most states, payday lending is permitted as of March 2026, but it often comes with conditions such as limits on how much you can borrow. The most common maximum borrowing amount is $500, but some states have much higher limits. It’s important to check the laws in your state to ensure you understand your rights. ^{[2] [3]}

What are the costs of a payday loan?

The cost of borrowing through a payday loan can be high. The CFPB notes that fees for storefront payday loans generally range from $10 to $30 for every $100 borrowed. For example, if you borrow $200 through a payday loan with a $15 fee per $100, you would pay back $230 in total. When expressed as an annual percentage rate (APR), a two-week payday loan with a $15 fee per $100 borrowed equates to an APR of approximately 400%.

As well as the charges associated with borrowing the money, there are some other fees you might encounter when using a payday loan. ^[4]

Extension and rollover fees

If you are unable to repay your payday loan when it is due, and your state law permits rollovers, the lender may allow you to pay only the fees currently owed and extend the due date of the loan. You will then be charged an additional fee while still owing the full original balance. Repeated extensions or rollovers can significantly increase the total cost of borrowing and may lead to a cycle of debt for some borrowers.

With the previous example, if you paid a rollover fee of $30, you would still owe the original $200 you borrowed and another finance fee of $30 when the extension ends. This means you’d be paying back a total of $260 for a $200 loan for four weeks. ^[4]

Late fees

If you don’t pay your loan on time and you’re not able to extend it, depending on your state’s laws, your lender may charge you a late fee. You might also be charged a non-sufficient funds (NSF) fee by your bank or credit union if your payment is missed because of a lack of funds in your account. ^[4]

Repayment plan fees

In some states, payday lenders must offer extended repayment plans if a borrower is not able to repay their payday loan. Depending on individual state laws, additional fees may or may not be permitted for using an extended repayment plan.

If payday lenders in your state are required to offer these repayment plans, you may be given more time to repay the loan without any costs or fees being added. In states that don’t require this, some lenders may still give you the option to use an extended repayment plan. It’s worth asking your lender about this if you’re having a hard time repaying the loan.

If you do not have the option of an extended repayment plan and you are still having difficulty making repayments, there are some other resources that may be able to help you. Consider speaking with a credit counselor, or contacting a legal aid attorney to discuss other options. Service members can also contact their local Judge Advocate General’s (JAG) office for more advice. ^[5]

Pros and cons of payday loans

As with most types of borrowing, there are pros and cons to payday loans that you should be aware of before you consider using one.

Pros

• Get funds quickly - In many cases, you can receive your loan funds on the same day you apply for it.
• No collateral - Payday loans are unsecured, meaning you don’t need to provide collateral like a car or house to be able to get financing. ^[1]
• Straightforward qualification - You usually won’t need good credit to qualify for a payday loan; many payday lenders don’t check your credit score when you apply. They will often check that borrowers are at least 18 years old, have valid identification, a current bank account and a steady income to repay the loan and fees. ^[4]

Cons

• High cost - Payday loan fees can make this a costly form of borrowing. According to the CFPB, a typical two-week payday loan with a $15 fee per $100 borrowed equates to an APR of almost 400%. ^[4]
• Short repayment window - Payday loans are typically due in a single lump-sum payment within two to four weeks of borrowing. Payday lenders do not generally assess a borrower's ability to repay the loan while meeting their other financial obligations, which can make repayment difficult for some borrowers. ^[1] These features may increase the likelihood of financial strain, particularly for consumers who rely on repeated borrowing to cover ongoing expenses.
• Post-dated check or auto draft authorization - To secure repayment, payday lenders typically require borrowers to provide either a post-dated check or authorization to electronically withdraw funds from their bank account on the due date. ^[1]
• No credit building - You don’t have the potential to establish credit or build credit with a payday loan, even if you repay it on time, as they are not reported to the credit bureaus. ^[7]
• Possible credit damage - If you fail to pay back your payday loan on time, the lender might sell your debt to a collection agency, and this could end up negatively impacting your credit score. ^[7]

Payday loan alternatives

For borrowers who need access to short-term funds, there are a number of alternatives to payday loans that may carry lower costs and more flexible repayment terms. These alternatives may offer lower costs, longer repayment terms, or additional consumer protections compared to payday loans.

Payday Alternative Loans (PALs)

The National Credit Union Administration (NCUA) allows federal credit unions to offer small-dollar loans known as Payday Alternative Loans (PALs). PALs cap the interest rate at 28% APR and limit the application fee to no more than $20. PALs I offer loan amounts between $200 and $1,000 with repayment terms of one to six months, while PALs II offer up to $2,000 with terms of one to 12 months. Borrowers may not hold more than one PAL at a time, or more than three within any six-month period. ^{[8] [9]}

Credit union and bank small-dollar loans

Some state-chartered credit unions offer products that are similar to PALs, but are not officially part of the PAL program. Federal credit union loans that are not official PALs have a maximum APR of 18%, according to the NCUA. This might be a better deal than a PAL with an APR of 28%, but these lenders might have more strict eligibility requirements. ^[8]

Personal loans

Personal loans from banks or online lenders may offer longer repayment terms and lower interest rates than payday loans, though they typically require a credit check. ^[8]

Credit card cash advances

A credit card cash advance allows borrowers to withdraw cash against their credit card limit. This can still be an expensive borrowing option as cash advances typically come with higher APRs than the card’s standard purchase APR, and interest starts to accrue immediately; however, these are still likely to be cheaper than payday loans. ^[8]

Other cash advances

Similar to credit card cash advances, other types of cash advances are available from other sources.

• Some employers may offer paycheck advances as a way to bridge a short-term cash gap. Whether this is available to you depends on your company’s policy and any state-specific rules.^[10]
• Cash advance apps, also known as early payday apps, offer cash advances that are usually repaid on your next payday. These advances can vary from $25 to $750, depending on the service, but higher amounts can be available for repeat borrowers. ^[11]
• Self Cash* is a quick and simple cash advance option that can help you cover unexpected expenses. There is no interest and no late fees, which is the main difference between Self Cash and payday loan products. It’s currently only available in select states.

*Self Cash is offered in the Self app only, bank account connection via Plaid and associated debit card required, not offered in all states. Fees apply for expedited disbursement. Cash advance amounts vary based on eligibility and may change periodically; no guarantee of offer.

Bottom line

Payday loans are a short-term, high-cost form of borrowing that are subject to varying regulations depending on your state. While they can provide quick access to small amounts of cash, the fees involved can translate into a high cost of borrowing, and the short repayment window can make them difficult to repay in full by the due date.

Before taking out a payday loan, you should be aware of the associated costs and consider alternative lending options that may not come with such high costs.

Sources

1. CFPB, “What is a Payday Loan?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/ Accessed April 9, 2026
2. Legal Clarity, “States Where Payday Loans Are Illegal” https://legalclarity.org/states-where-payday-loans-are-illegal-bans-caps/ Accessed April 9, 2026
3. Fin Masters, “Legal Status of Payday Loans by State” https://finmasters.com/legal-status-of-payday-loans-by-state/ Accessed April 9, 2026
4. CFPB, “What Are The Costs and Fees For a Payday Loan?” https://www.consumerfinance.gov/ask-cfpb/what-are-the-costs-and-fees-for-a-payday-loan-en-1589/ Accessed April 9, 2026
5. CFPB, “What Can I Do If I Can’t Repay My Payday Loan?” https://www.consumerfinance.gov/ask-cfpb/what-can-i-do-if-i-cant-repay-my-payday-loan-en-1601/ Accessed April 9, 2026
6. CFPB, “What Do I Need to Qualify For a Payday Loan?” https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-qualify-for-a-payday-loan-en-1593/ Accessed April 9, 2026
7. CFPB, “Can Taking Out a Payday Loan Help Rebuild My Credit?” https://www.consumerfinance.gov/ask-cfpb/can-taking-out-a-payday-loan-help-rebuild-my-credit-or-improve-my-credit-score-en-1611/ Accessed April 9, 2026
8. My Credit Union, “Payday Alternative Loans” https://mycreditunion.gov/manage-your-money/consumer-loans-credit-cards/payday-alternative-loans Accessed April 9, 2026
9. Credible, “What is a Payday Alternative Loan?” https://www.credible.com/personal-loan/payday-alternative-loan Accessed April 9, 2026
10. The Credit People, “Can I Get a Cash Advance Without My Credit Card?” https://www.thecreditpeople.com/loans/can-i-get-a-cash-advance-without-my-credit-card Accessed April 28, 2026
11. Experian, “Payday Loan Vs Cash Advance App” https://www.experian.com/blogs/ask-experian/payday-loan-vs-cash-advance-app/ Accessed April 28, 2026

About the author

Becca has over 10 years of experience as a content writer, working across various industries including finance, digital marketing, education, travel, and technology. Her work has been featured in publications including Forbes, Business Insider, AOL, Yahoo, GOBankingRates, and more.