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What is a payday loan?

While there is no set definition of a payday loan, it is usually a short-term, high-cost loan, generally for $500 or less, that is typically due on your next payday. Depending on your state law, payday loans could be available through storefront payday lenders or online.

Money from the loan can be given in cash, by check, through an electronic deposit, or on a prepaid card. Most payday loans share a few common features.

  • Relatively small amounts. The loans are for small amounts, and many states set a limit on payday loan size. A common loan limit is $500, although limits range above and below this amount.
  • Relatively short loan terms. A payday loan is usually repaid in a single payment on the borrower’s next payday, or when income is received from another source, such as a pension or Social Security. The due date is typically two to four weeks from the date the loan was made. The specific due date is set in the payday loan agreement.
  • Authorization for automatic repayment. To repay the loan, you generally write a post-dated check for the full balance, including fees. Or, you give the lender authorization to electronically debit the funds from your bank, credit union, or prepaid card account. If you don’t repay the loan on or before the due date, the lender can cash the check or electronically withdraw money from your account.
  • No credit check or financial check. Payday lenders do not generally verify your ability to repay the loan while meeting your other financial obligations.
  • Payment terms can vary. Payday loans are often structured to be paid off in one lump-sum payment. Some state laws permit lenders to “rollover” or “renew” a loan when it becomes due so that you pay only the fees, and the lender extends the due date of the loan. Some payday loans are set up to be repaid in installments over a longer period of time.

How much does a payday loan cost?

Many state laws set a maximum amount for payday loan fees, ranging from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. By comparison, APRs on credit cards can range from about 12 percent to about 30 percent. In many states that permit payday lending, the cost of the loan, fees and the maximum loan amount are capped.

Is my state allowed to ban payday loans?

Some states do not have payday lending because the loans are not permitted by the state’s law or because payday lenders have decided not to do business at the interest rate and fees permitted in those states. In states that do allow or regulate payday lending, you can find more information from your state regulator or state attorney general .

Protections for servicemembers

Active duty servicemembers and their dependents have protections on loans through the federal Military Lending Act (MLA). The protections include a cap of 36 percent on the Military Annual Percentage Rate (MAPR), as well as other limitations on what lenders can charge for payday and other consumer loans. Contact your local Judge Advocate General’s (JAG) office to learn more about lending restrictions. You can use the JAG Legal Assistance Office locator to find help.