Payday Loans 101


When you're short on cash and need to cover an expense quickly, a payday loan could be a lifesaver. As long as you have a job, an active checking account, and meet minimum age requirements in your state, you might qualify for a cash advance on your next paycheck in as little as 15 minutes. But fast money isn't cheap. Payday loan interest rates could run in excess of 500%, depending on the lender. No, that's not a typo.

Here are six more things you should know about payday loans.

1. Payday loans are short-term loans. 

Unlike a personal loan or line of credit, payday loans are typically due in full by your next scheduled payday. Repayment terms can be as short as seven calendar days. If you take your time repaying the loan, fees snowball quickly. This makes it possible to owe substantially more than you initially borrowed after only a few weeks. 

2. Payday loans are not available in every state.

While you can obtain a payday loan in Colorado, you won't be able to get one in Arkansas, Arizona, Georgia, New Jersey, New York, North Carolina, Vermont, or West Virginia. Some states limit or outlaw payday loan companies in an effort to protect consumers. For example, the Arizona Attorney General's Office encourages consumers to contact them if they see signs advertising payday loans.

3. Payday loan terms vary by state.

The maximum loan amount, finance charges, and repayment terms differ depending on your state of residence.

Payday Loans Sample State Comparison

State Finance Charges Maximum Loan Amount Repayment Terms
Colorado No more than 36% $500 Minimum of 6 months
Idaho No restrictions on fees 25% of the borrower’s gross monthly income or $1,000, whichever is less Maximum of 37 months for loans over $300
Maximum of 25 months for loans less than $300
New Hampshire No more than 36% $500 7 to 30 days

Sources: Colorado Legislative Council, Initiative #126, August 20, 2018
Idaho Statutes, Title 28, Chapter 46, Part 4 Payday Loans
Payday Loans in New Hampshire, NH Banking Department


4. Payday loans aren't paycheck substitutes.  

While Oregon's maximum payday loan amount is $50,000 and Wyoming has no stated limit, these are not the norm. Typical limits range between $300 and $2,000. The most you could receive through a payday loan company in Colorado is $500. So, if you work full-time or earn higher than average wages, this may be far less than your regular paycheck. 

5. Payday loan lenders are businesses, not banks.

Many consumers mistakenly assume that they are borrowing funds from a financial institution when they sign a payday loan promissory note. These short-term, high-interest rate loans follow a different business model than banks or credit unions. Unlike traditional loans, payday loans do not require a credit check and funds are available within minutes. Some payday loan companies attempt to justify the high cost of borrowing money because of their flexible lending practices. 

6. Payday loan companies may request access to your bank account.

As a condition of loan approval, you could be required to provide banking account information so the payday loan company can disburse funds directly into your designated account. This is often sold as a "direct deposit loan feature" that allows you to receive cash the same day you apply for the loan. Remember that this also makes it easier for the company to withdraw funds when payment is due. 

NOTE: Payday loan regulations change. Check payday loan laws by visiting the attorney general's website for your state.

While a payday loan could help you through a rough patch, it could also spell disaster for your finances. These high-interest rate loans cause you to commit future income to cover a current money crisis. Failing to repay the full amount right away makes it easy to get trapped in an ongoing debt cycle.. 

Explore ways to increase your income and reduce expenses over the long-term. This could help you create a financial cushion you can access anytime you need cash in a hurry, without relying on payday loans.