Payday loan

Also called cash advance loan, deferred deposit loan

A small, short-term, high-cost loan due on the borrower’s next payday, usually repaid in one lump sum including a flat fee.

What it means

Payday loans are typically a few hundred dollars and due in about two weeks. The lender charges a fee per $100 borrowed and often takes a postdated check or access to the borrower’s bank account. Little or no credit check is involved, which makes them easy to get.

When converted to an annual rate, the cost is often several hundred percent. Many borrowers cannot repay the full amount on time and roll over or reborrow, paying new fees each cycle. State laws vary widely: some cap fees or ban payday lending, while others allow it with few limits.

Formula

APR ≈ (fee ÷ amount borrowed) × (365 ÷ loan term in days) × 100

fee = flat finance charge
loan term in days = days until repayment is due

Example

Suppose a lender charges $15 per $100 on a two-week loan. Borrowing $400 costs $60 in fees, and the equivalent APR is about 391% ($15 ÷ $100 × 365 ÷ 14).

How it’s used

Covering an urgent expense before payday
Situations where traditional credit is unavailable
Understanding why alternatives are worth comparing

Strengths and weaknesses

Strengths

Fast access to cash
Minimal credit requirements
Simple application

Weaknesses

Extremely high cost compared with most credit
Rollovers can trap borrowers in repeated fees
Bank account access can lead to overdraft charges

Good to know

Alternatives may include credit union small-dollar loans, payment plans with the biller or an employer paycheck advance.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.