In most cases, you cannot get a payday loan without a checking account. Lenders require a checking account to deposit the loan funds and, more importantly, to withdraw the repayment automatically on your payday. While some lenders may offer alternatives, like cash-based loans, they are rare and often come with even higher fees. Having a checking account is a standard requirement for almost all reputable payday lenders.
What is a Payday Loan?
Payday loans are a type of short-term, high-interest loan designed to help people get cash quickly. Borrowers typically repay the loan from their next paycheck, which is why it's called a «payday loan». While they offer fast cash, they come with significant risks. Because of their high interest rates and fees, you can end up paying back much more than you originally borrowed.
Not all states allow payday loans. In fact, 16 states and the District of Columbia have banned them entirely, including Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia. These bans are in place because predatory lenders can charge excessive fees and interest rates, which can easily lead borrowers into a cycle of debt.
Over the years, several laws have been passed to regulate interest rates and protect consumers from falling into a debt trap.
Understanding Payday Loan Traps
Same-day loans may seem like a quick fix, but they come at a high cost. Unlike a mortgage or car loan, lenders don't require collateral, which adds to their convenience but also to their risk. Lenders often charge high interest rates, and unfortunately, some may even include hidden fees.
Many lenders don’t prioritize your ability to repay the loan. This can lead to a debt trap where you are forced to take out another loan just to cover the previous one, piling on additional fees. Before turning to payday lenders, consider other options. Safer loans, such as personal loans from a bank or credit union, are available with better terms and lower rates.
How Do Payday Loans Work?
Getting a cash advance loan can be a simple and fast process. With traditional storefront creditors, you'll need to provide proof of income and bank information. If approved, you can get the cash instantly. Online lenders often transfer funds electronically within one to two business days.
To secure the loan, you either provide the lender with a post-dated check for the repayment date or you authorize them to electronically debit your bank account on a specific date. This date is almost always your next payday, typically within two weeks but sometimes up to a month.
With in-store loans, you may have more flexibility. You can often pay off the loan early if you wish. If the loan isn't repaid by the due date, the lender will try to collect payment through the method you authorized, such as cashing the check or making an electronic withdrawal. Online lenders often automate this process by setting up scheduled debits from your checking account.
How Much Do Payday Loans Cost?
The interest rates on these high-cost loans are exorbitant. While the average rate is around 400% APR, some can be as high as 1,460% APR. This is many times higher than what's considered acceptable.
Most U.S. states have laws that limit interest rates on loans to between 5% and 30%. However, a lack of proper regulation in some states allows lenders to take advantage of borrowers. For example, in Texas, where there's a $300 limit, lenders can still charge a 15% commission. For a two-week loan of $300, that commission translates to a staggering 460% APR!
Unfortunately, many people facing financial hardship agree to these predatory interest rates. Payday loans are marketed as a short-term solution, but lenders often encourage loan extensions, pushing borrowers deeper into a debt cycle.
Are Payday Loans Legal?
Since 2016, the United States has been actively taking steps to protect borrowers from predatory lenders. The Consumer Financial Protection Bureau (CFPB) has implemented a series of rules aimed at preventing people from falling into «debt traps», cycles of high-interest loans they cannot repay on time.
Key Provisions of CFPB Rules
- Mandatory Ability-to-Repay Assessment. Before issuing a loan, the lender must make sure the borrower can actually afford to repay it.
- Written Notice of Collection. Borrowers must be notified in writing in advance of any attempt to collect funds from their bank account.
- Limit on Collection Attempts. A lender can only attempt to collect funds twice without the borrower's consent.
In 2019, under the Trump administration, the CFPB attempted to roll back some of these rules. However, the ability-to-repay requirement was reinstated in 2020, and the debt collection restrictions remained in place. In June 2022, the Biden administration's CFPB implemented even stricter rules for payday lending.
Are Payday Loans Fixed or Variable?
Payday loans are often marketed as a convenient way to get cash until your next paycheck. Unlike other loans with accruing interest, they have a fixed fee. Typically, the fee ranges from $10 to $30 for every $100 borrowed. For instance, if you borrow $200 and the fixed fee is $20, you would pay back a total of $220.
Payday Loans and Credit Scores
It's important to know that not all lenders report loan repayments to the credit bureaus. This means that a history of timely payments may not help your credit score, but a single missed payment could. If you fall behind on payments, your information may be sent to collection agencies, which report delinquencies to the credit bureaus. A negative mark on your credit report can remain for up to seven years.
Depending on your state's laws, unpaid debts may be subject to legal action. If the lender takes you to court, the debt collection information will become part of the public record, which will also negatively impact your credit report.
How to Get a Payday Loan
- Prepare Your Documents. Have a government-issued ID and proof of income, such as a recent pay stub. If you don't have one, open a checking account. Most lenders require these to verify your identity and determine your borrowing limit. Having them ready will speed up the application process, whether you apply in-store or online.
- Check the Disclosures. Payday lending rules vary by state, but a reputable lender will always be transparent. They should disclose their license, the total amount of the debt, and the repayment terms. You should also get a clear breakdown of all fees, including the annual percentage rate (APR). Understanding this upfront will help you make an informed decision and avoid paying more than necessary.
- Plan to Repay. The golden rule of taking out a payday loan is to have a specific plan to repay the entire amount on time. Consider your regular expenses to make sure you can afford the payments without putting yourself in a difficult position. This responsible approach will help you avoid additional fees and the potential need for another loan to cover the first one.
How Fast Can You Get a Payday Loan?
Payday loans are marketed as a fast way to get cash for unexpected expenses. These are often loans with no credit check, so even if you have bad credit, you may still qualify. You can apply online and typically get a decision on your loan offer within an hour. If approved, the funds could be deposited directly into your checking account by the end of the same business day or the next.
Payday Loan Alternatives
While payday loans can be a quick option for those needing a small amount of money, it's crucial to consider alternatives due to the financial risk.
- Borrow from Friends or Family. This can save you from fees and interest, but be sure to agree on repayment terms in writing to avoid future conflicts.
- Personal Loans. You can get these from a bank or credit union. They typically have much lower interest rates and more favorable terms.
- Employer Cash Advances. Some companies offer advances for emergencies. Repayment is usually made through payroll deductions.
- Assistance Programs. Nonprofits and government agencies often have programs that provide funds for emergency needs without the high fees of a payday loan.
- Credit Unions. These financial institutions often offer small-dollar loans with lower interest rates and more flexible terms than traditional banks.
- Emergency Fund. Building a small savings fund can provide a financial cushion for unexpected expenses. Even small contributions can grow over time and help you cover emergencies without needing to borrow.
These options may require more effort than getting a payday loan, but they are significantly less financially risky in the long run.
Frequently asked questions
To find a legitimate lender, always check if they are licensed to operate in your state. A reputable lender will be transparent about all fees, including the Annual Percentage Rate (APR), before you sign an agreement. You can also check for online reviews and complaints with the Better Business Bureau (BBB) or your state’s financial regulatory body. Be wary of lenders who promise instant approval without any checks or who pressure you into signing an agreement quickly.
If you can't repay your loan by the due date, you may be able to extend or «rollover» the loan. However, this is one of the biggest risks of a payday loan. When you roll over the loan, you only pay the fees, and the original loan amount is extended for another term, adding a new set of fees. This can quickly spiral into a debt trap, with the total cost of the loan growing far beyond the original amount you borrowed.
A payday loan may not directly affect your credit score if you pay it back on time, as most payday lenders don't report on-time payments to the three major credit bureaus (Equifax, Experian, and TransUnion). However, if you default on the loan and the debt is sold to a collection agency, that agency will almost certainly report the delinquency to the credit bureaus. This can cause a significant drop in your credit score, which can stay on your report for up to seven years.
While both provide quick cash, they are different. A credit card cash advance allows you to withdraw cash from your credit card's line of credit. It typically has a lower interest rate than a payday loan, but the interest often starts accruing immediately, and there's a cash advance fee. A payday loan, on the other hand, is a short-term loan that is not tied to a credit card and is repaid with your next paycheck. Payday loans generally have much higher interest rates than credit card cash advances.