Payday Loans & the Cycle of Debt: What You Must Know Before Borrowing

Have you ever been short on cash before? Probably so. We all have.

But have you ever experienced a “cash shortage emergency?” The type where you need immediate funds to pay for an unexpected car repair or trip to the hospital?

How about rent? Or, did you just need some help keeping the lights on and food on the table?

Most of us have at one point or another, which probably went a long way toward helping us learn the true value of money, while ultimately making us more budget-conscious in the future.

But when it’s occurring, it can feel like our lives are falling apart and our worlds are poised to come crashing down at any moment.

And when you found yourself in this position, you might have turned to a short-term payday loan in order to bridge the temporary financial gap and to keep you afloat.

After all, more than 12 million people borrow from payday lenders on an annual basis, and applying for one is as easy as a quick online application.

However, as your mother once scorned, “Just because it’s popular doesn’t mean that you should do it.” Your mother’s smart woman, because this advice is especially relevant when it comes to payday loans.

In this guide, we’ll outline everything you need to know about payday loans, including what they are, how they work, and some in-depth pros and cons you can use to decide whether or not they’re right for you.

So, do you want the truth about payday loans? Here it is.

What is a Payday Loan? What Are Some Common Features?

At it most basic, according to the Consumer Financial Protection Bureau, a payday loan is:

“A short-term loan, generally for $500 or less, that is typically due on your next payday. Payday loans generally have three features:
  • The loans are for small amounts.
  • The loans typically come due your next payday.
  • You must give lenders access to your checking account or write a check for the full balance in advance that the lender has an option of depositing when the loan comes due” [we’ll talk more about this in a moment].

In addition to the above, another common feature about payday loans is that they almost always come with extraordinarily high interest rates and finance charges, often amounting to anywhere between $10 and $30 for every $100 borrowed.

Payday Loans By the Numbers

Based on this, let’s do some quick math (all figures below were derived from’s payday loan calculator):

Imagine that you take out a $500 payday loan, due in 14 days, with a fee of $20 per $100 borrowed (we’ll talk more about the process in a moment). You’re definitely short on options (as well as money), so you justify the added expense and think to yourself, “Hey, these fees really aren’t too bad.”

But once you crunch the numbers, you quickly find out that you’ll be paying a total of $600 for your loan, and that the extra $100 in fees represents a whopping annual percentage rate of 521%!

This is in stark contrast to cash advances on credit cards, which, while still very high, generally hover between 12 and 30 percent.

Payday Loans & “Churning”

Here’s the kicker though: At first glance, the above numbers may not seem too shocking, until you learn that approximately 75% of all payday loans are “churned”—meaning they’re extended beyond the initial 2 week agreement—which accounts for ¾ of all payday loan volume

In fact, payday loans “churn” an average of 8 times over 5 months, leaving customers paying hundreds of dollars more than their original loan amount due to high interest rates and continuous fees.

The vast majority of payday lending activity (and profit) isn’t related to new loans, it’s related to keeping customers in a debt trap.

And considering that “the average payday borrower has nine transactions per year,” we can see that the vast majority of payday lending activity (and profit) isn’t related to new loans, it’s related to keeping customers in a debt trap.

Despite this, most payday loan customers aren’t well informed about these extraordinarily high interest rates, since “Over 40% of borrowers believe payday loan rates are less than 30% APR, not much more than a credit card rate. If fact, payday loans rates are typically about 400% APR, over 13 times what these borrowers thought.”

And to add insult to injury, these predatory lending practices are perfectly legal, since payday lenders are technically charging “fees” instead of “interest,” the latter of which would be subjected to banking regulations, where the former is not.

Are Payday Loans a Good Idea? Do Payday Loans Help Your Credit Score?

Considering their extraordinarily high interest rates, along with the fact that 75 percent of customers pay recurring fees to “churn” their loans, nearly all professionals recommend avoiding payday loans if possible (we’ll talk about how you can do this in a moment). 

Despite this, many payday lenders advertise that their services can help repair your credit, which—based on the fact that they target individuals with poor FICO scores—might seem like an added bonus. But based on what we just learned, this is an extraordinarily expensive way of doing so.

In a lot of instances, customers who can’t keep up with the high APR and fees default on their payday loans, ultimately leaving their credit score worse for the wear afterward. Instead, as we wrote about in How to Repair Bad Credit Scores, we recommend:

  • Downloading your credit report from all three reporting bureaus and disputing any errors you find
  • Obtaining a secured credit card
  • Reporting your rent payments to each credit bureau
  • Even hiring a third-party credit reporting agency could be beneficial, as long as you understand you can accomplish nearly identical results on your own (with some time and effort, of course)

Related: Good Credit Score and How to Get There: A Detailed Guide for Moving From Average to All-Star

Outside of those with low credit scores, who are payday lenders’ primary customers? What demographic makes up their target market? Let’s find out.

Who Are the Primary Customers for Payday Loans?

Although it might be easy to believe that payday lenders disproportionately target low income minorities, the reality is that average payday loan borrowers are “white, female, and are 25 to 44 years old.” However, this Pew report goes on to state:

“After controlling for other characteristics, there are five groups that have higher odds of having used a payday loan: those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced.

​It is notable that, while lower income is associated with a higher likelihood of payday loan usage, other factors can be more predictive of payday borrowing than income. For example, low-income homeowners are less prone to usage than higher-income renters: 8 percent of renters earning $40,000 to $100,000 have used payday loans, compared with 6 percent of homeowners earning $15,000 up to $40,000.”

Another mischaracterization is that customers primarily use payday loans as stopgap measures due to an unexpected emergency. But the reality is that “69 percent used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food,” while just “16 percent dealt with an unexpected expense, such as a car repair or emergency medical expense.”

2012 Pew Research studyAccording to a 2012 Pew Research study, most payday loan customers don’t use the money to cover unexpected expenses or emergency situations. (IMAGE CREDIT: The Pew Charitable Trusts)

Regardless of race, gender, or anything else though, one of the primary users of payday loans is those with poor—or no—credit. This is because these types of customers typically don’t qualify for traditional loans, so the payday route is really their only option.

In fact, many payday lenders expressly boast that they don’t even run a person’s credit when estimating their loan worthiness. The CheckIntoCash website sums up this aspect nicely:

“Check Into Cash Advance Centers do not use traditional credit reporting agencies when reviewing applications. We use non-traditional, unique, credit underwriting guidelines. So even if you have bad credit or have had a bankruptcy, we still may be able to help you.”

With this in mind, let’s take a quick look at how the payday loan process works.

What’s the Payday Loan Process Look Like? How Does Payday Loan Work?

In general, payday loans work over the following 3 steps:

1. Applying for a Payday Loan. What Do You Need to Get a Payday Loan?

Although each payday lender will have its own application process and underwriting criteria, which can vary from state to state, applying for a payday loan usually takes place either at a retail location or online. 

Regardless of where you apply though, payday loan applications can generally be completed in a matter of minutes, since they only request basic information such as name and address, contact information, date of birth, social security number, and employer details. 

Then, once you’ve handed over your application or pressed the Submit button, it will often be another short few minutes until you’ve received an approval or denial. (On the other hand, if you submitted your application through a payday loan lead generator, such as Money Mutual or, you’ll likely start receiving emails and a flood of calls from lenders interested in earning your business, after which point you’ll begin the application process.)

Once your application is on the books, most retail lenders will require that you write a postdated check for the amount of your loan, plus any associated fees (e.g. application fees, standard interest, etc.). Of course, you’ll also need to bring a state issued ID and proof of income (pay stub, checking account statement, etc.).

If you apply for a payday loan online, you’ll fill out an electronic version of this same application, without the requirement for ID and so forth. However, some lenders may initially approve you online but require that you visit a retail location in order to complete the process, where the additional documentation above will be requested—especially if this is your first loan with the company.

2. Receiving Your Payday Loan

After you’ve been approved for your payday loan, whether online or in-store, the money is generally direct-deposited into your checking account within 1 business day, although some lenders may take as long as 3-5 business days. Some lenders will also provide cash in hand, a check, or a prepaid debit card loaded with money at retail locations (versus a direct deposit), although these practices are becoming increasingly uncommon.

3. Repaying Your Payday Loan

If you handed over a postdated check at a retail payday location, on the day it comes due, the lender will cash the check. If you completed the process solely online, the lender will likely automatically withdraw the loan amount, plus any fees.

Assuming that everything goes exactly as planned (and it rarely does, which we’ll discuss shortly), 1-2 weeks have passed at this point, your loan has been paid in full, and you’re free and clear. And if you decide to reapply for another payday loan from the same lender, your application process and the time it takes to receive your money, can be much faster.

Pros & Cons of Payday Loans

Despite the doom and gloom we’ve talked about up until this point, it’s not all bad news when it comes to payday loans—depending on your perspective, of course. This is because, according to industry website, payday lenders: 

  • Boast a total of 23,000 retail locations (almost as many as McDonalds), 
  • Directly employ more than 77,000 individuals, 
  • Generate $2.9 billion in income, and 
  • Have a $6.4 billion impact on the overall economy. 

Clearly, payday loans are big business, which is likely one of the primary reasons the industry has continued to flourish, despite their less-than-stellar business practices and poor customer reputations. Not to mention the powerful lobbying groups they’ve formed that contribute millions each year to politicians across both parties, swaying legislation in their favor.

A graph showing Lobbying TotalsPayday lenders donate millions per year to politicians on both sides of the aisle, giving them enormous influence in legislation that’s beneficial to their interests. (IMAGE CREDIT:

This includes the Bankruptcy Abuse Prevention and Consumer Protection Act, which made it more difficult for consumers to waive payday loan debt after filing bankruptcy. 

Sure, we all know that money breeds corruption in government, but let’s recap what we’ve learned so far and outline some down-to-earth pros and cons associated with payday loans that affect you as a customer:

Payday Loan Pros

Payday loans can generally be applied for quickly and new customers can have cash in hand in as little as a day (for repeat customers, this can be a matter of minutes).

Payday lenders typically have much more lenient approval criteria than traditional banks, making them a prime target for individuals with poor or no credit. And if you repay your loan on time, it can actually help improve your credit.

Payday loans are often convenient, as many customers can complete the process completely online, without every having to leave their home.

Payday Loan Cons

Payday loans come with extraordinarily high fees and interest rates, often reaching 500% or more. And it’s often this ease of obtaining a payday loan (mentioned above) that causes consumers to overlook the associated pitfalls.

These loans are very short term, often lasting just a couple weeks, so you’ll need to come up with the money to repay them quickly.

If you don’t repay your payday loan on time, you may be presented with the option of rolling it over for another 2-week cycle, although interest and other fees will continue to accrue.

With this in mind, the average payday loan rolls over (or “churns”) 8 times over the course of 5 months, typically leaving customers in a much worse position than when they started, “creat[ing] a financially dangerous cycle of dependence in borrowers.” This is known as a debt trap.

However, the reality is that most payday lenders are less concerned about an individual’s ability to repay the loan than they are about collecting interest and fees.

Google Takes a Stance On Payday Loans

As a prime example of the industry’s (well-earned) poor reputation, even Google claims the payday “lending practice exploits the poor and vulnerable by offering them immediate cash that must be paid back under sky-high interest rates.” As a result, they recently banned all payday loan advertisements on their site.

As you can see, taking out a payday loan may solve your short-term cash needs, but will often put you in a much worse position that previously. So, instead of borrowing one, let’s take a look at other avenues you can take.

Thinking About a Payday Loan? Try These 10 Tips First

1. If you’ve been turned down by a traditional bank, try applying for a payday loan through a credit union, which will often come with much more favorable terms.

2. Ask your employer for a pay advance, or a family member for a small, short-term loan (just be sure to pay it back in a timely manner).

3. Alternately, you can log on to online lending communities such as

4. Sell unwanted items on Craigslist or eBay.

5. Negotiate with a creditor about making payments on any outstanding bills, which can not only help you pay off the debt, but can also help you keep more money in your bank account for other expenses.

6. As a last resort, if you have a credit card with a high enough available limit to cover your short-term needs, this could offer a better solution than a payday loan. Just be sure to pay off the balance as soon as you’re able.

But here’s the truth: While the above options might help you get out of a sticky financial situation and avoid taking out a payday loan, your ultimate goal should be to get your finances in order, which will take some modifications to your lifestyle and your behavior. Here are a few actionable suggestions:

7. Stop taking on any additional debt. Sure, purchasing something might help you temporarily feel better, but you’ll ultimately just end up with more debt and greater stress (for tips on dealing with stress—financial or otherwise—be sure to read 6 Ways to Naturally Improve Your Focus, Energy, Productivity, and Decrease Stress).

8. Reduce your living expenses by using public transportation, consolidating your debt, refinancing your home, transferring credit card balances to lower interest cards, reducing your energy demands, no longer spending money on extraneous entertainment, and more.

9. Learn to budget your weekly and monthly expenses, so you can know what your financial obligations look like before they sneak up and surprise you. Otherwise, it’s much easier to live outside your means.

10. Start putting money into an emergency fund as soon as possible; even $500 can go a long way toward avoiding the need to take out a payday loan once a difficult stretch rears its ugly head. However, once you use this money, be sure to replenish it as quickly as possible.

Although these suggestions might go a very long way toward helping you avoid a payday loan, what can you do if you’ve already taken one out?

What Can You Do If You’ve Already Taken Out a Payday Loan?

First and foremost, if you took your loan out within the last 24 hours (depending on your state), most payday lenders will allow you to return the money at no cost.

If it’s been more than 24 hours, the best idea is to pay it off as quickly as possible. If you don’t think that you’ll have enough money in your account when the time comes, see one of the options above before you find yourself quickly spiraling into a debt trap.

If the payday lender has already attempted to cash your original check and you’ve been assessed insufficient funds fees by your bank, contact them and see if any can be reversed.

Finally, if you feel that you’ve been the victim of illegal or fraudulent practices related to your payday loan, be sure to submit a complaint with the Consumer Financial Protection Bureau.

What’s Your Experience with Payday Loans?

Here at HighYa, we work diligently to ensure that you have some of the most up-to-date information about becoming a more informed consumer, but the reality is that we can’t do it alone. Which is where you come in!

Have you taken out a payday loan before? If so, tell us about your experience. Were you able to pay it off on time? Do you have some actionable tips that could help others do the same? 

Share your expertise with more than 2 million monthly HighYa readers by leaving a comment below.

More on Getting Out of Debt:

Derek Lakin

Senior Editor at HighYa. With more than a decade of experience as a copywriter, Derek takes a detail-oriented, step-by-step approach to helping you shop smarter. Whether it’s nutritional supplements or new scams, he believes an informed consumer is a happy customer. Connect with him on Twitter: @DALwrites


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