Payday Loans Explained: How They Work and What They Really Cost

A payday loan is a short-term, high-cost loan, generally for $500 or less, that is due in one payment on your next payday. That is the CFPB’s definition, and every part of it matters: short-term means two to four weeks, high-cost means a fee that annualizes to triple-digit APRs, and due in one payment means the whole balance plus the fee leaves your account on a single day. This guide walks through the loan from the application to the day the money comes back out, with the numbers from the CFPB’s own examples, and ends with what to know about sites like this one that are not lenders at all.

What a payday loan is, and is not

The CFPB’s plain description covers the mechanics: you borrow a small amount, you give the lender either a post-dated check for the full balance including fees or authorization to debit your bank, credit union, or prepaid card account, and the lender cashes the check or runs the debit on the due date.

Three things make it different from most other borrowing:

• No amortization. There are no monthly payments that chip away at the balance. One payment, one date.
• A fee, not an interest rate. The price is quoted as dollars per $100 borrowed, usually $10 to $30 per $100 depending on the state. The APR you see on the disclosure is that fee restated as a yearly rate.
• Your paycheck is the collateral. The loan is unsecured in the legal sense, but the lender is paid from the account your wages land in, on the day they land.

It is also not a cash advance from an earned-wage app, not a bank small-dollar loan, and not an installment loan, all of which are covered in payday loan alternatives that actually work and installment vs payday loans.

The life of a payday loan, step by step

1. The application. A storefront lender wants a pay stub or other proof of income, a checking account, a government ID, and a post-dated check or a debit authorization. Online lenders ask for the same information in a form plus your bank login or routing and account numbers so they can verify deposits and set up the debit. Most do not pull a full credit report from the major bureaus; many check a specialty database that tracks payday borrowing instead.

2. Verification. The lender confirms your income and that the account is open and receives deposits. This is what stands between an approval and the money. Storefronts do it on the spot; online lenders usually do it within hours.

3. Funding. Storefront borrowers often walk out with cash or a check. Online borrowers get an ACH deposit, usually the next business day, sometimes same day for an added fee.

4. The due date. On your next payday, typically 14 days out, the lender deposits the check or runs the debit for the full amount plus the fee. Nothing is due before then, and nothing is optional on that day. If the money is there, the loan is over.

5. If the money is not there. This is where the product turns. Three things can happen, and they are not exclusive:

• The debit fails. Your bank may charge an overdraft or NSF fee, and the lender may charge its own returned-payment fee and try the debit again. The CFPB’s 2016 study of online payday payments found that half of online borrowers had at least one debit attempt that overdrafted or failed, that those borrowers paid an average of $185 in bank penalty fees on top of anything the lender charged, and that 36% of the accounts with a failed debit from an online lender were eventually closed by the bank.
• You roll it over. Where the state allows it, you pay the fee to move the due date to your next payday. The CFPB’s example: a $300 loan with a $45 fee, rolled once, has cost $90 in fees and still owes the full $300. The fee does not reduce the balance.
• You get an extended payment plan. Several states require the lender to offer, on request, a plan that splits the balance into installments with no additional fee. Lenders rarely volunteer it. Our guide on payday extended payment plans lists where they exist and how to ask.

6. Default and collections. If the loan is neither repaid nor rolled nor put on a plan, the lender can keep attempting the debit, sell the debt to a collector, and in most states sue for the balance. What happens if you default on a payday loan covers what a lender can and cannot legally do, including the fact that unpaid payday debt is a civil matter, not a criminal one, no matter what a collector says on the phone.

What it actually costs: one worked example

The CFPB’s standard example is $15 per $100 borrowed for two weeks. On a $300 loan:

	Amount
Borrowed	$300
Fee at $15 per $100	$45
Due in 14 days	$345
Fee as a share of the loan	15% for two weeks
Annualized (15% × 365 ÷ 14)	About 391% APR

Two things to read off that table. First, $45 for two weeks does not sound like much, and that is by design. Second, the 391% is not money you pay; it is what the two-week price would be if it repeated all year. It exists so you can compare this loan to anything else with an APR. A 36% APR loan of $300 for the same 14 days costs about $4 in interest.

The real cost depends on what happens on the due date. Repaid on time, the loan costs $45. Rolled over three times, it costs $180 in fees on a $300 balance that has not moved, before any bank penalties. The CFPB’s 2014 analysis found that more than 80% of payday loans are rolled over or renewed within two weeks, which is why the on-time figure is the exception, not the rule.

The payday cost calculator on our payday loans page lets you change the amount, the fee, the days, and the number of rollovers and see the total and the APR for your own numbers.

Where the rules come from: your state

There is no single federal price cap on payday loans. What a lender can charge, how much it can lend, whether it can roll a loan over, and whether it must offer a payment plan are all set by state law, and the states disagree sharply:

• Some states cap small-loan APRs at a level, usually 36%, that makes the traditional payday product unprofitable, so it is effectively not offered there.
• Some allow it with limits on the fee per $100, the maximum amount, the number of loans you can have at once, and rollovers, often with a mandatory extended payment plan.
• Some allow it with few limits beyond licensing and disclosure.

The lender must be licensed in your state (or, for tribal and some online lenders, claim an exemption that your state may or may not recognize). Before borrowing, look up the rules and the lender’s license with your state regulator. Our payday loan laws by state guide lists the current status for every state with links to each regulator, and what payday loans cost in Texas, Florida’s payday loan rules, and California’s payday loan rules each work through one state’s rules in detail.

Lenders, lending networks, and sites like this one

When you search for a payday loan you will see three kinds of sites, and they are not interchangeable:

• A lender makes the loan, holds the license, sets the fee, and takes the payment. Its name is on the loan agreement.
• A lending network does not lend. It takes loan requests and passes them to the lenders it works with, who decide whether to make an offer.
• A loan-request site or lead generator collects your request and sends it to one or more networks or lenders, and is paid when it does.

EconoCents is the third kind. We are not a lender, we make no credit decisions, and we do not set any loan’s terms. When you submit a loan request through our form, we pass it to the lending networks you consent to, and those networks pay us for the request. If a lender in a network wants to make you an offer, you are sent to that lender to review the actual amount, fee, APR, and due date before you agree to anything, and you can walk away at that point. Submitting a request does not guarantee an offer, and the networks and lenders you consent to may contact you afterward; you can revoke that consent at any time through our contact page.

Two practical consequences. Your request may go to more than one lender, so read every offer, not just the first. And the fee you eventually pay is the lender’s, set under your state’s law; nothing on this site changes it.

Before you decide

A payday loan is a reasonable tool only for a gap you are certain your next paycheck will close, taken from a licensed lender, with no rollover. For anything recurring, or anything larger than one paycheck can absorb, the alternatives cost less, often far less, and an installment loan spreads the repayment instead of taking it from one check. If you already have a payday loan you cannot clear, start with how to escape the payday loan cycle.

This is general information, not financial advice. Fees, limits, and legality vary by lender and by state. Confirm current figures with the lender and your state regulator before you borrow.