Payday loans are short-term cash loans based on the borrower’s personal check held for future deposit or on electronic access to the borrower’s bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.

Requirements to Get a Payday Loan

All a consumer needs to get a payday loan is an open bank account in relatively good standing, a steady source of income, and identification. Lenders do not conduct a full credit check or ask questions to determine if a borrower can afford to repay the loan.  Since loans are made based on the lender’s ability to collect, not the borrower’s ability to repay while meeting other financial obligations, payday loans create a debt trap.

CFPB found that 80 percent of payday borrowers tracked over ten months rolled over or reborrowed loans within 30 days.  Borrowers default on one in five payday loans. Online borrowers fare worse. CFPB found that more than half of all online payday instalment loan sequences default.

Payday Lenders

Payday loans are made by payday loan stores,  or at stores that sell other financial services, such as check cashing, title loans, rent-to-own and pawn, depending on state licensing requirements. Loans are made via websites and mobile devices.  CFPB found 15,766 payday loan stores operating in 2015.

Legal Status for Payday Lending

High cost payday lending is authorized by state laws or regulations in thirty-two states. Fifteen states and the District of Columbia protect their borrowers from high-cost payday lending with reasonable small loan rate caps or other prohibitions. Three states set lower rate caps or longer terms for somewhat less expensive loans.  Online payday lenders are generally subject to the state licensing laws and rate caps of the state where the borrower receives the loan. 

No Credit Check Loans

Payday loans are sometimes marketed as no credit check loans. You don’t need good credit scores or even a credit history, and getting approved is easy relative to more traditional loans. As a result, they are popular with people facing financial difficulties.