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Payday loans are also called cash advance loans, deferred deposit loans, postdated check loans, or check advance loans. They are short-term, high-interest loans. People who use these loans tend not to have access to other types of lending, and this is a last resort to get them through to the next paycheck.
Many states consider these loans predatory because of their high interest rates and financing fees. Some states place caps on the fees and interest rates or ban this type of lending completely.
Read on to find out what a payday loan is, how one works, and other options for those who need a short-term loan or cash advance.
Key Points
• Payday loans are short-term, high-interest loans typically for $1,000 or less.
• Borrowers must be 18 years old, have a checking account, and provide proof of income.
• Loans are repaid on the next payday, usually through direct debit or a postdated check.
• High interest rates and fees can trap borrowers in a cycle of debt.
• Alternatives to payday loans include credit cards, cash advance loans, TSP loans, and personal loans.
What Is a Payday Loan?
Payday loans, also known as cash advances, are high-interest, short-term loans, typically for $1,000 or less. They are notorious for having very high interest rates and fees. There are few payday loan requirements, but borrowers typically need to be over 18, have a checking account in good standing, and show that they earn a secure income.
Consumers can find these types of loans through online lenders, apps, and local brick-and-mortar merchants. The loan amount is typically paid back by direct debit once the borrower receives their next paycheck. Alternatively, loans may be secured with a postdated check.
How Does a Payday Loan Work?
Consumers fill out an application with a lender and show proof of identity, a recent pay stub, and a bank account number if required.
Borrowers have to secure the loan with a postdated check or agree to have the funds debited from their account when they are paid, usually in two weeks. Loans are usually $50-$1,000, and funds could be deposited within minutes of approval. Borrowers can also receive cash.
People with bad credit and access to better financing tend to use these loans to help them get by temporarily. However, payday loan problems are well-known: High interest rates and exorbitant fees can trap someone in spiraling debt if they cannot repay the loan on time.
The Center for Responsible Lending found that repeat borrowing is the norm, with 72% of users taking out more than one loan within a two-week period. Borrowers then face multiple monthly payments and interest rates compounding their debt load.
Many states place caps on the interest rates and fees charged for payday loans. Some states, such as New York, have outlawed them completely.
What Are the Requirements for a Payday Loan?
Most working adults qualify for a payday loan. Here are the most common standards:
Age
Borrowers must be at least 18 years of age.
Proof of Income
Applicants have to show proof of income, such as a pay stub.
Citizenship
Consumers may have to show proof of U.S. citizenship.
Bank Account
Borrowers need to have a bank account that is in good standing.
Payday Loan Interest Rates
Depending on the state, it’s not uncommon for payday loans to have an annual percentage rate (APR) of 1,500%.
In states that cap interest rates on payday loans, lenders may instead charge a fee that is a percentage of the amount loaned. Finance charges can be $10-$30 for each $100 borrowed.
Payday Loan Amounts
Payday loan amounts are usually $50-$1,000. Many states restrict payday loan amounts by limiting the number of payday loans a customer may take out, the number that can be taken out simultaneously, the number of renewals or rollovers available, or the total amount a customer can borrow.
Alternatives to a Payday Loan
Rather than take out a high-interest payday loan, there are better options for people in a precarious financial situation.
Credit Cards
If the borrower has a credit score, using a credit card is a safer bet than a payday loan. As of August 2026, the average credit card interest rate is around 24.92%, while the average APR for a payday loan is 400%., However, it is often not possible to make rent, mortgage, and auto or student loan payments with a credit card, and the borrower may need cash.
Earned Wage Access
Earned wage access (EWA) allows you to use money you’ve earned before your employer’s scheduled payday. This access is offered by apps such as EarnIn, which allows users to access up to $150 per day up to a maximum of $1,000 per pay period of their earned wages. Depending on the provider, users may pay a fee for each transaction or access funds within 1-3 days for free with optional costs, such as expedited fees or tips. Access to an EWA app could be part of payroll benefits, but some operate independently of employer payroll systems. You just need to show recurring direct deposits that verify your income and set your withdrawal limit.
TSP Loans
A Thrift Savings Plan (TSP) account is a tax-deferred retirement savings and investment plan that offers federal employees the same tax advantages as a 401(k) retirement plan. If you have a TSP retirement account, you can take out a general purpose loan from that plan for a fee of $50. However, you must pay the amount back to the account within 12-60 months with interest to avoid paying tax or penalties. (The 2026 TSP loan interest rate is 4.50%, which is much lower than the interest on a payday loan.)
Personal Loans
For consumers with a good credit score, banks and online lenders offer unsecured or secured personal loans. Unsecured loans are not backed by any collateral and will have a higher interest rate than a secured loan, but not as high as a payday loan.
Unexpected expenses can be paid for with a personal loan and at a lower interest rate. Many people take out personal loans to pay off credit card debt because the interest rate on a personal loan is less than the interest rate paid on their credit card debt. Getting approved for a personal loan can be easier if you have good credit.
Loan payback terms can be between one and seven years, with loan amounts ranging from a few hundred dollars to $100,000. If you manage the payments on a personal loan responsibly, you can build up a strong credit history. That is not the case with payday loans, which are not typically reported to credit rating bureaus.
The Takeaway
Payday loans are short-term loans that cash-strapped consumers use to get by until their next paycheck. The borrower is expected to repay the loan on their next payday, or they may submit a postdated check. Interest rates are extremely high because of the risk to the lender that the borrower will default. Unfortunately, this is often the case, and borrowers can find themselves spiraling into debt as interest and fees accumulate. For this reason, some states have banned payday loans.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
What are the requirements to get a payday loan?
Most working adults qualify for a payday loan. A borrower needs to be 18 or over, show proof of income (a paystub) and citizenship, and have a bank account.
Is proof of income a requirement for a payday loan?
A lender requires proof of income because they want to know you have the means to pay the loan back. A recent pay stub or similar documentation is typically enough.
Is taking out a payday loan a good idea?
Basically, no. A payday loan should only be used as a last resort and if you are sure you can pay back the loan in two weeks. Even then, the interest you will pay will be much higher than a cash advance or a short-term loan from an online lender.
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