What is a payday loan? Could a payday loan be the right solution if you need cash—fast?

In this post, we’ll help you learn the ins-and-outs of payday loans so that you can make an informed decision. We’ll start with the definition of payday loan, illustrate how payday loans work, then cover the potential advantages and drawbacks.

What are payday loans?

A payday loan is a small, short-term loan intended to cover unexpected expenses that can’t wait until you receive your next paycheck. Payday lenders typically charge a fixed fee based on the amount borrowed, and you have until your next payday to pay off the amount borrowed plus the fee.

You can apply for a loan from a payday lender online or in-person at a storefront. The amount you can borrow ranges from $100 to $1000, depending on the state, and funds are usually available the same day.

How do payday loans work?

Step 1: Apply.  You apply for a payday loan of $300 with a $45 fee (approximately 400% annual percentage rate, or APR).

Step 2: Get cash.  After approval, the lender will provide you with $300 by depositing it into your checking account, or issuing you cash, a check or a prepaid debit card.

Step 3: Set up repayment method.  You can agree to repay the loan by writing the lender a check for $345 that they will hold until the due date, or grant the lender authorization to electronically withdraw $345 from one of your accounts on the due date.

Step 4: Repay on payday.  On the due date, the lender deposits the check or withdraws the funds as repayment for the loan.

What are the potential advantages?
There are two main reasons that payday loans can be attractive to some borrowers. The funds are available fast—although there are other ways to get fast cash that should be considered, as well. We’ll cover a few examples below.

What are the potential drawbacks?

Because the lump sum is due relatively quickly, some borrowers find it difficult to repay a payday loan on time. Four out of five payday borrowers renew their loans, usually before their next paycheck, and one in five renew their loan at least seven times. Each time a loan is rolled over or a new one is taken out, the lender charges more fees—creating a cycle of debt that can be difficult to break.

Another potential drawback is that payday loans are typically only available in small amounts. Depending on your state, you may only be able to borrow a few hundred dollars, which might not be enough to cover your emergency expense.

Finally, the interest rate on a payday loan is usually on the higher end of the loan spectrum. We’ll review some options below that may provide fast cash at a lower rate.

What are some payday loan alternatives?

Payday loans aren’t your only option in a financial emergency—there are several other ways to borrow money fast. For example, a personal installment loan, loan from a family member, or auto title loan might be better a fit for your personal financial situation.

Need help narrowing it down?  Check out our handy visual guide to cash loan options.

Payday Loans At-a-Glance

 COST

 Flat fee based on amount borrowed

 AMOUNT

 Usually less than $1,000

 REPAYMENT TERM

 Your next payday / within a few weeks

 PAYMENTS

 One lump sum, equaling the amount borrowed plus fee

 

Is a personal installment loan right for you? Apply for a RISE loan today and get cash in your account as soon as tomorrow. RISE helps you take control of your debt and improve your financial situation.

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Installment Loans vs. Payday Loans: Which is Better?

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Considering a payday loan or an installment loan? Understanding the differences can help you make an informed decision before you borrow.