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Payday Loans: Everything You Need to Know

Payday loans are an option for anyone in a sticky financial situation. But, they come at a cost.

Keep reading to learn more about how they work and if getting one is the right decision for you.

What is a payday loan?

A payday loan is a short-term, high-cost loan that you can use to cover any immediate cash needs. They’re designed to cover you until your next paycheck comes, hence the name. 

You only need to show proof of income and an active bank account to get one.

How payday loans work

Payday loans work differently than other consumer and personal loans because you don’t need to have collateral to get one. You work with a physical branch or online vendor who will loan you cash based on your current income. 

The laws in each state vary for how much you can borrow and how much the lender can charge in interest rates and fees. Once approved, the funds will appear in your bank account and you’ll need to repay the loan in full, plus fees, by your next paycheck. 

Be sure to check out the specific rules where you live before moving forward with the process.

Pros and cons of payday loans

Payday loans are definitely a risky business. It’s important to understand what you’ll be getting and giving in return before applying. 


The best part about a payday loan is it does give you a large sum of cash, which can be very helpful in an emergency situation. Plus, you only need to show proof of income and an active bank account to get one – which means your credit score (good or bad) doesn’t affect anything. 


More times than not, payday loans set people up for greater debt. Because the process to obtain a loan is so easy, many people become reliant on them as a way to make ends meet. 

The loans are due back so quickly and have such high fees, it can actually backfire and end up costing you more. 

For example, the cost of a loan is usually $15 for every $100 borrowed. That means an interest rate of 15%. But because you have to pay back the loan in two weeks, the 15% charge equals an annual percentage rate (APR) of 400%! Yikes. 

For comparison, a credit card APR is typically only 12-30%.

How to get a payday loan

To start, a payday lender will verify your proof of income and bank account information. 

You’ll also need to have a valid ID and show you are at least 18 years old. The loan funds will arrive in your account within 24 hours and will need to be paid back immediately after your next payday, so typically in two weeks and up to one month. 

The loan amount is determined by the amount of money you earn and lenders will charge a very high amount of interest.

What you need for a payday loan

It’s fairly easy to get a payday loan–you just need a job, valid ID, and to be at least 18 years old. A pay stub will work as proof of income.

It is possible to be rejected from getting a payday loan, though. Here are a few reasons why that could happen:

  • You don’t earn enough money. Lenders often require borrowers to make at least $500 a month.
  • Lenders think you won’t be able to repay the loan. If a lender suspects you aren’t worth the risk, they won’t loan you the cash.
  • You already have outstanding loans. Many lenders are able to check if you’re borrowing money from somewhere else already.
  • You are active-duty military. According to federal law, payday lenders cannot make short-term loans at more than 36% APR to military members. 
  • You’ve recently gone through bankruptcy.
  • You haven’t been employed long enough to meet lender requirements.
  • You have recently bounced checks.
  • Your bank account hasn’t been open for a long enough amount of time.


Is a payday loan secured or unsecured?

Payday loans are unsecured personal loans because lenders charge borrowers a very high amount of interest and do not require any collateral.

Are payday loans fixed or variable?

Payday loans work by having lenders charge a fixed fee that is typically much more expensive than other forms of credit. 

Can you get a payday loan with unemployment?

If you’re unemployed, a payday loan might look very tempting. But, because lenders require a consistent source of income to qualify for a loan, you probably won’t be able to get one.

Unemployment benefits are only offered for a limited amount of time, so it doesn’t look very appealing to lenders. Seasonal workers, however, are more likely to obtain a payday loan.

What happens if you don’t pay back a payday loan?

If you can’t pay back your payday loan, lenders will begin to call you and send letters from their lawyers to try to get the money. 

Or, they could outsource the loan to a debt collector which could result in a civil lawsuit. They can even try to continue to withdraw money from your bank account, because they have that information already.

Abigail Masterson

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