How do payday loans work?

Payday loans are a small-dollar loan, usually $500 or less, that is typically due to be repaid by your next paycheck.

These short term loans are an option that many people use when they need a relatively small amount of cash to cover an emergency expense.

Learn: Where can I get a payday loan?

Part of the reason people turn to payday loans when they're in a pinch is because these loans don't require a credit check. Instead, you simply need to provide a valid form of ID, proof of income (like a paystub or bank statement), and either a post-dated check or an authorization to withdraw funds from your bank account.

If your payday loan application is approved, you should get the cash in less than 24 hours. This money is usually delivered to your bank account or through a money transfer service like MoneyGram, and some lenders will also let you pick up cash in-store.

Once you have the money in your account, you're free to use it however you need — whether that's paying rent, covering an unexpected auto repair, or something else.

Learn: What are payday loans used for?

Then comes the not-so-great part. Once your next payday arrives, the lender will cash the check you gave them or debit your bank account to repay the loan... And you're going to owe a bit more than you borrowed. 😬

For a payday loan, lenders usually charge anywhere between $10-$30 in interest for every $100 you borrow, every two weeks. That biweekly fee comes out to an average APR of about 400% and, in many cases, it can be even higher.

Learn: How is the interest rate on a payday loan calculated?

This can add up fast, causing many people to need to extend their loan or, even worse, take out yet another loan — a dangerous cycle you don't want to find yourself in.^[1]

The high cost of payday loans can greatly threaten your ability to repay if you don't stick to your repayment schedule. If you need cash in an emergency, it's better to explore other lending options before turning to a payday loan. Though, if it is indeed your last resort, my advice would be to repay it as quickly as possible.