Can You Get a Low-Interest Payday Loan?

No, low-interest payday loans don’t really exist. Payday loans are short-term loans designed to provide quick cash — usually $500 or less — to borrowers who need funds before their next paycheck, but they have very high interest rates. These loans usually only require basic information, like proof of income, a checking account and identification.

While payday loans allow individuals with poor or no credit history to access funds, they often come with high processing fees and repayment terms as short as two weeks. You should therefore consider safer financing alternatives, like a personal loan.

You can quickly end up in a cycle of debt if you aren’t careful with your planning of these types of loans.

Key Takeaways

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Payday loans are short-term, high-cost loans that typically need to be repaid by your next payday. They do not require a credit check, making them accessible to people with poor credit.

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Payday loans often have extremely high fees, leading to annual percentage rates (APR) of 400% or more. MoneyGeek therefore doesn’t recommend them.

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Safer alternatives to payday loans include payday alternative loans, credit cards and personal loans.

How Do Payday Loans Work?

Payday loans don’t require credit checks, which makes them accessible to borrowers with poor credit scores or those with little to no credit history. To apply, you generally need to provide proof of income, a valid ID and a checking account.

Once approved, the lender provides the funds, typically via direct deposit or cash. You must repay the loan in full, including fees, by your next payday, usually within two weeks. Most lenders ask for a postdated check or authorization to withdraw the amount directly from your bank account when the loan is due.

If you cannot repay the loan on time, some lenders allow you to “roll over” the loan, which means extending the due date for an additional fee. This means you’ll owe even more on top of the original loan, which isn’t a wise financial decision.

Rolling over a payday loan can trap borrowers in a cycle of debt, as fees continue to accumulate with each extension, making repayment increasingly difficult.

AVOID ROLLING OVER A PAYDAY LOAN!

Some states have banned rollovers completely, while others allow them with strict regulations. Also, many states impose limits on how many times a loan can be rolled over and may require lenders to provide specific disclosures about the costs associated with rollovers. — Alvin Yam, CFP

How Much Do Payday Loans Cost?

Payday loans are short-term, high-cost loans typically used for small amounts of money, often $500 or less. According to the Consumer Financial Protection Bureau (CFPB), the cost of these loans varies, but many states cap fees at $10 to $30 for every $100 borrowed. This results in extremely high annual percentage rates (APRs) — often close to 400% for a two-week loan with a $15 fee per $100 borrowed.

For example, borrowing $300 for two weeks with a $15 fee per $100 would result in a $345 repayment, translating to a 391% APR. By contrast, personal loan APRs typically range from 6% to 36%, while credit cards usually charge between 12% and 30%. Unless under extreme circumstances, there are better options out there for quick short-term financing.

Risks of Payday Loans

While payday loans seem like an easy solution for financial emergencies, they often trap borrowers in debt. Here are some of the reasons to avoid them:

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    Costly Fees

    Payday loans come with high fees that make borrowing expensive. The fees often equal an annual percentage rate (APR) of 400% or more. If you can't pay the loan back, many payday lenders allow you to roll over the loan for an additional fee. This rollover extends the repayment period but adds more fees, increasing the overall cost and making it even harder to pay off the loan. States have special restrictions on rollovers.

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    Risk of Debt Cycle

    Payday loans often lead to a cycle of debt. Because they must be paid back quickly, many borrowers struggle to repay them on time. This can result in additional fees, loan extensions or taking out another payday loan to cover the first one. Over time, this creates a cycle that is hard to escape and can further damage your financial situation.

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    Doesn't Build Credit

    Payday loans do not help you build credit. Lenders typically do not report payday loans to credit bureaus. Even if you repay them on time, your credit score won't improve. However, if you default on the loan, the lender may send your account to collections, which could negatively impact your credit score.

Payday Lending State Regulations

Payday lending laws vary by state, with significant differences in how payday loans are regulated or restricted. While some states impose caps on loan amounts and fees, others prohibit payday loans entirely due to their high costs and potential to trap borrowers in debt.

Currently, the District of Columbia and these 18 states ban payday loans: Arizona, Arkansas, Connecticut, Georgia, Illinois, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Dakota, Vermont and West Virginia. According to the Pew Charitable Trusts, these states have opted for more stringent consumer protections to prevent predatory lending practices.

Below is a table summarizing payday lending regulations for a few larger states:

State
Maximum Loan Amount
Maximum Loan Term
Finance Charges

California

$300

Up to 31 days

15% of check amount

Florida

$500

7 to 31 days

10% fee plus verification fee

Illinois

$1,000

Minimum of 13 days

APR capped at 36%

Michigan

$600

Up to 31 days

11% to 15% based on the number of deferred presentment service transaction

Ohio

$1,000

One year

APR capped at 28%

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CHECK IF A PAYDAY LENDER IS LICENSED TO DO BUSINESS IN YOUR STATE

Many states have laws requiring payday lenders to obtain a license, and if a lender isn't licensed, your loan might be void. To check if a payday lender is licensed in your state, contact your state's banking regulator or attorney general. They can confirm whether the lender is legally authorized to operate.

Alternatives to Payday Loans

When facing a financial emergency, payday loans might seem like a quick solution, but they often come with more risks than benefits. Before turning to a payday loan, consider exploring safer and more affordable alternatives.

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    Payday Alternative Loans

    Many credit unions offer payday alternative loans (PALs) with lower fees and longer repayment terms than traditional payday loans. PALs are designed to help borrowers with short-term financial needs while avoiding the high costs associated with payday loans. These loans often come with more reasonable interest rates and provide better protections for borrowers.

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    Credit Card

    Using a credit card can be a safer and more affordable option compared to payday loans. While credit cards charge interest, their APRs are usually much lower than the fees on payday loans. If you can pay off the balance quickly, you may avoid paying high-interest rates. Many credit cards also offer grace periods, giving you more flexibility in managing short-term financial needs.

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    Personal Loan

    Personal loans from banks, credit unions or online lenders typically offer better terms than payday loans. These installment loans come with lower interest rates, longer repayment terms, and fixed monthly payments. Although personal loans may require a credit check, many lenders provide options for borrowers with fair or poor credit. They can be a more sustainable way to manage larger financial needs. A personal loan can be unsecured or secured (back by collateral).

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    Borrow From Friends or Family

    Borrowing money from friends or family can be a cost-effective way to manage a short-term financial crisis. Unlike payday loans, there are no interest rates or fees involved. However, it’s important to clearly discuss repayment terms upfront to avoid any potential misunderstandings or strain on your relationship. This option should be approached with care and responsibility.

FAQ About Payday Loans

MoneyGeek addressed some frequently asked questions about payday loans to provide valuable insight and help you make informed decisions.

Are payday loans legal?

Is getting a payday loan worth it?

What's the difference between a payday loan and a personal loan?

Do payday loans have interest rates?

How do I get a payday loan?

Can I get a payday loan with bad credit?

What if I can't repay a payday loan?

About Zachary Romeo, CBCA


Zachary Romeo, CBCA headshot

Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.


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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

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