The Pros and Cons of Payday Loans

Payday loans may seem like an easy borrowing solution when you’re feeling financial stress. These short-term loans often offer fast access to cash without a credit check. But the convenience of this type of financing typically comes at too high a price.

It’s common for payday loans to feature annual percentage rates (APRs) of close to 400%.^[1] Meanwhile, the average credit card interest rate was 21.47% in Q4 2024 based on Federal Reserve data. The average personal loan interest rate for a 24-month loan was 12.32% during that same time period.^[2]

Due to the high expense of payday loans, it’s wise to seriously consider alternative financing solutions before you borrow money this way. If you’re still leaning toward using a payday loan, you should at least have a clear understanding of how these loans work along with their drawbacks and risks. Here’s what you need to know.

What is a payday loan and how does it work?

A typical payday loan is a short-term loan for a small amount of money that features high fees. Because of state laws, payday loans may work a bit differently depending on where you live. But many payday loans have the following features in common.

• No credit check: With most payday loans, you don’t need good credit to borrow money. In fact, many payday lenders won’t check your credit as part of your loan application.^[3] So, you don’t have to worry about a hard inquiry impacting your credit score either.
• Small loan amounts: Payday loans are sometimes called “small dollar loans.” A common payday loan amount is $500. But you may be able to borrow more or less depending on state law, your income, and other factors.^[4]
• High fees: Fees for payday loans can vary from state to state. But no matter where you take out a payday loan, it tends to be expensive. Finance charges for payday loans may range from $10 to $30 per $100 you borrow (based on state law) per the CFPB. A $15 fee per $100 is typical—the equivalent of around a 400% APR for a two-week payday loan.^[5] Payday lenders may also charge rollover fees, late fees, and prepaid debit card fees which could increase overall borrowing costs even more.
• Short repayment terms: Borrowers often need to repay payday loans (plus any fees the lender charges) by their next pay period. That’s how payday loans get their name.
• Lump-sum payments: Repayment terms on payday loans can differ. But many payday lenders require you to pay back the money you borrow, plus any fees, in a single lump sum. The average payday loan payment is a lump sum of $430 on the borrower’s next payday—approximately 36% of the average borrower’s income according to research in 2016 by Pew Charitable Trusts. Yet the typical borrower can only afford payments equal to around 5% of their income while still having enough money left over for basic expenses.^[6]
• Autopay requirements: When you take out a payday loan, a lender will often require you to write a post-dated check to repay the full loan amount plus finance fees. Alternatively, you might have to give a payday lender authorization to auto-draft your bank account for the repayment of your loan plus fees on the upcoming due date.^[4]
• Rollover options: In some states, payday lenders may offer borrowers the chance to renew, refinance, or rollover a payday loan when it becomes due. If a state allows this practice, a borrower might be able to pay only the fees associated with their payday loan instead of their full lump-sum payment on the due date. In some cases, a borrower might pay an extra rollover fee to extend their payday loan. Unfortunately, any of these practices can lead to a cycle of debt that’s hard to break.
• Extended repayment plans: Some states have intervention policies that require payday lenders to offer extended repayment plans that aim to help borrowers break the payday loan cycle and reduce debt. With this type of extended repayment plan, a borrower should be able to divide their outstanding payday loan into smaller installment payments—usually for no additional charge. But even in states where free or low-cost extended repayment plans are available, payday lenders aren’t always great about telling borrowers they can use them.^[7]

Other names for payday loans

It’s important to understand that lenders may also advertise payday loans by different names. If you see any of the following terms online, on a flyer in your mailbox, or on a roadside sign, it could indicate that a company is marketing payday loans.

• Cash advance
• Paycheck advance
• Short-term loan
• Fast cash or fast loan
• Payday advance loan
• Bad credit loan
• Deferred deposit transactions

Note: Car title loans and pawn shop loans are two other small dollar financing products that are similar to payday loans. Both of these types of loans also tend to be predatory and expensive.

The pros and cons of payday loans

Before you apply to borrow money, you should always consider the benefits and drawbacks that type of financing has to offer. Yet because payday loans are notorious for being high risk, it’s wise to be extra cautious as you review the pros and cons of these types of loans.

Pros of payday loans

• Fast funding speed: If you’re eligible for a payday loan, you can typically access your loan proceeds fast. In many cases, you may receive a payday loan as soon as the same day you apply for financing.^[8]
• Simple qualification requirements: You typically don’t need good credit to qualify for a payday loan. Many payday lenders don’t even bother checking the credit of their loan applicants. Instead, it’s common for payday lenders to verify that applicants have steady income and current bank account to repay their new debt plus any loan fees.^[9]
• No collateral: Unlike car loans, home loans, auto equity loans, or home equity loans, payday loans are unsecured. So, you don’t typically need to provide a payday lender with traditional collateral (like your car or home) to be eligible for financing.

Cons of payday loans

• High cost: The fees payday lenders charge tend to be exorbitant. The average APR for these types of loans hovers around 400%, and in some cases the APRs on payday loans may soar above 700%.^[10]
• Difficult to repay: Due to the short repayment terms and lump-sum payment requirement that most payday lenders require, it can be hard for many people to pay back their payday loans in full by their next pay period. Around 80% of borrowers rollover their payday loans (or quickly borrow again) since the average lump-sum payment takes around a third of a borrower’s next paycheck according to Pew Charitable Trusts.^[11]
• Post-dated check or auto draft authorization: Most payday loans don’t require traditional collateral. But when you borrow from a payday lender, you typically must provide a post-dated check or permission to electronically withdraw money from your bank account on your due date. Some lenders have been known to abuse this access and withdraw funds from borrower’s accounts without permission.
• Predatory lending practices: Some payday lenders may use unethical tactics when dealing with borrowers. Victims of predatory payday lenders have complained of overcharging, failure to make required loan disclosures, deceptive advertising language, advance fees, unauthorized bank account withdrawals, and other predatory practices.^[12]
• No credit building: Payday loans don’t have the potential to help you establish credit. Even if you repay a payday loan as promised, avoiding rollovers and late payments, payday loans cannot help you establish credit history nor can they lift your credit score.
• Potential credit damage: If you default on a payday loan, the lender might sell or assign your debt to a collection agency. As a result, you could wind up with a collection account on your credit report and experience credit score damage for up to seven years.^[13]

Alternatives to payday loans

Many people turn to payday loans because they lack emergency savings during times of financial hardship. Yet even with a bad credit score, there may be alternative ways to borrow money—many of which could be less expensive and less risky than a payday loan.

Below are some smarter borrowing solutions you may want to consider before taking out a payday loan.

1. Credit card for bad credit

A credit card could be another way to borrow money, even when you have credit challenges. As with loans, you can apply for both secured and unsecured credit cards. But the collateral that backs a secured credit card account is typically a cash security deposit that the card issuer holds in a savings account or certificate of deposit (CD).

Secured credit cards may be easier to open if you have bad credit or no credit score. And while these types of credit cards may help you build credit (when you manage them responsibly), they’re probably not a good financing solution if you’re trying to borrow money to cover a financial emergency.

On a positive note, some unsecured credit card offers may be available to consumers with bad credit or no credit score. These types of credit card offers do tend to feature less attractive borrowing terms (e.g., interest rates, annual fees, etc.) compared to credit card offers for good credit. But credit cards for bad credit should still be more affordable than payday loans.

Plus, if you always pay off your full credit card balance each month, you can use a credit card without paying interest on the money you borrow. Just be aware that you might still owe an annual fee or other fees associated with the account.

2. Bad credit personal loan

A personal loan is another possible way to borrow money for emergencies, basic expenses, debt consolidation, and a variety of other financial needs. Of course, lenders typically reserve the best personal loan offers for borrowers with excellent credit. But even with fair credit or bad credit, you may find personal loan offers that make sense for your situation.

If you’re comparing payday loans vs. personal loans, personal loan interest rates may range anywhere between 7% to 36% as of March 2025 according to Forbes Advisor.^[14] While a subprime personal loan might not feature the most affordable interest rate and fees, it could be a better borrowing solution than a payday loan.

If you decide that a personal loan is right for you, it’s still important to compare offers from multiple lenders before finalizing your loan application. Shopping around for the best deal could help you save money on fees and interest charges over the life of your loan.

3. Payday alternative loan (PAL)

Some credit unions offer a small-dollar borrowing solution to members known as a payday alternative loan or PAL. A PAL is a short-term loan designed to work as lower-cost alternative to payday loans.

With a PAL, you can borrow between $200 and $1,000. Yet instead of having to repay the money you borrow (plus fees) by your next pay period, the credit union must offer you loan terms between one and six months.

Additionally, the maximum application fee for a PAL is $20 and APRs must be 28% or less—much lower than the fees you’d encounter for a payday loan. Members of some credit unions may also be able to take advantage of free financial counseling services as an added benefit.^[15]

4. Loan from a friend or family member

No one likes to ask to borrow money from a family member or friend. But if you’re facing the choice of paying outrageous fees for a payday loan (and possibly getting trapped in a debt cycle) or asking for a favor, a loan from someone who cares about you might be worth considering.

On the plus side, there’s no credit check with a loan from a friend or family member. But there could be a risk to your relationship if you don’t repay the money you borrow as promised. So, consider creating an official loan agreement (in writing) that’s affordable for your budget, and stick to the terms to avoid any potential hard feelings.

5. Government and emergency assistance programs

When you’re facing financial hardship, you may be able to find assistance through federal and state government assistance programs. In addition to these resources, charitable emergency aid programs in your community may offer financial relief as well.

• Government assistance programs: Visit USA.gov/financial-hardship for information about how to apply for government programs that offer help with essential needs like food, housing, and utility bills for eligible individuals. ChildCare.gov can also help you learn more about available financial resources in your state that help with the cost of child care.
• Other emergency assistance programs: Charitable and religious organizations in your local community may offer helpful resources such as financial assistance, food pantries, temporary transportation, and more. If you’re not sure where to start your search, platforms like FindHelp.org may help you locate free or low-cost assistance in your area.

How to qualify for a payday loan

If you still want a payday loan after you consider alternative borrowing options, you should understand that they’re not available everywhere due to their predatory nature. So, it’s wise to confirm that payday loans are legal in your state before you apply for financing. (Note: It’s also important to be aware that some payday lenders use loopholes to operate and charge high fees even in states where payday loans are restricted.)^[16]

Assuming payday loans are legal in your state, you may be able to apply for a payday loan online or at an in-person brick-and-mortar location. To qualify for a payday loan, most lenders will require you to have the following.

• Valid identification proving you’re at least 18 years old.
• A current, active bank account (or, in some cases, a prepaid debit card).
• Proof of income from a job or other acceptable source.^[9]

Of course with either option, you’ll want to review offers from multiple payday lenders before you proceed. It’s also essential to make sure to review all of the fees a payday lender charges and understand all borrowing terms to protect yourself as much as possible. As a rule of thumb, you should typically only consider a payday loan when you’ve exhausted all other options.

Moving forward

Despite the fact that payday loans may be an easy way to borrow money, this type of financing comes with big risks. Payday loans can trap you in a cycle of debt that’s hard to break. And high fees combined with short repayment periods (which often lead to rollovers or extensions) can make payday loans one of the most expensive ways to borrow money.

Before you move forward with a payday loan, it’s smart to explore alternative solutions. More affordable financing options may be available—even if you need to work on establishing or rebuilding your credit. There may also be financial assistance programs that could offer you relief depending on the situation.

Over time, two of the best ways to avoid payday loans are to create a savings plan and build your credit. Even a small emergency fund could put you in a better financial position when unexpected expenses arise. And as you work to build credit, you may have access to more attractive and affordable financing solutions in the future if and when you need to borrow money.

Sources

1. Consumer.FTC.gov. “What To Know About Payday and Car Title Loans.” https://consumer.ftc.gov/articles/what-know-about-payday-and-car-title-loans#payday.
2. FederalReserve.gov. “Consumer Credit.” https://www.federalreserve.gov/releases/g19/current/.
3. Experian.com. “What Is a Payday Loan and How Does It Work?” https://www.experian.com/blogs/ask-experian/how-payday-loans-work/.
4. ConsumerFinance.gov. “What is a payday loan?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/.
5. ConsumerFinance.gov. “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/
6. PewTrusts.org. “Payday Loan Facts and the CFPB’s Impact.” https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact.
7. ConsumerFinance.gov. “Market Snapshot: Consumer use of State payday loan extended payment plans.” https://files.consumerfinance.gov/f/documents/cfpb_market-snapshot-payday-loan-extended-payment-plan_report_2022-04.pdf.
8. NerdWallet.com. “What Is a Payday Loan and How Does It Work?” https://www.nerdwallet.com/article/loans/personal-loans/what-is-a-payday-loan.
9. ConsumerFinance.gov. “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/.
10. CoasCenters.Howard.Edu. “Lured Into Debt: How Payday Loans and Paycheck Apps Exacerbate Financial Struggles in Underserved Communities.” https://coascenters.howard.edu/lured-debt-how-payday-loans-and-paycheck-apps-exacerbate-financial-struggles-underserved.
11. PewTrusts.org. “Payday Loans and Overdraft.” https://www.pewtrusts.org/en/research-and-analysis/articles/2023/06/02/payday-loans-and-overdraft-a-short-history-and-whats-next.
12. ResponsibleLending.org. “The Victims of Payday Lending.” https://www.responsiblelending.org/issues/victims-payday.
13. myFICO.com. “How Do Collections Affect Your Credit?” https://www.myfico.com/credit-education/faq/negative-reasons/collections-affect-credit.
14. Forbes.com/advisor. “Best Personal Loan Rates.” https://www.forbes.com/advisor/personal-loans/personal-loan-rates/.
15. MyCreditUnion.gov. “Payday Alternative Loans.” https://mycreditunion.gov/manage-your-money/consumer-loans-credit-cards/payday-alternative-loans.
16. PewTrusts.org. “How to Reform State Payday Loan Laws.” https://www.pewtrusts.org/en/research-and-analysis/articles/2023/06/08/how-to-reform-state-payday-loan-laws.

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

Editorial policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).