How much does a payday loan cost?

The cost of a loan from a storefront payday lender is typically $15 for every $100 borrowed, according to research from the federal Consumer Financial Protection Bureau. For a two-week loan, that’s effectively a 391% APR.

Online payday lenders tend to charge higher rates and often claim exemption from state rate caps. The CFPB found the median online payday loan cost $23.53 per $100 borrowed. That’s a 613% APR.

If the loan isn’t repaid in full on the first payday, a new finance charge is added and the cycle repeats. Within a few months, borrowers can end up owing more in interest than the original loan amount. The average borrower pays $520 in fees to repeatedly borrow $375, according to The Pew Charitable Trusts.

That’s why payday loans are risky — it’s easy to get trapped in a cycle of debt and expensive to get out.

Does paying back payday loans build credit?

Not usually. Most payday lenders don’t report on-time payments to credit bureaus, so the loan can’t help your credit scores or build your credit.

If you don’t pay the loans back, however, your credit can be damaged. The payday lender may report the default to the bureaus or sell the debt to a collections agency that will do so, hurting your scores.

What happens if I can’t repay a payday loan?

Lenders will continue to try to withdraw money from your account, sometimes breaking amounts into smaller chunks to increase the chance the payment will go through. Each failed attempt can trigger bank fees against you.

At the same time, payday lenders will start calling you and sending letters from their lawyers. They may even call your personal references.

A lender may try to negotiate a settlement with you for some part of the money owed. Or the lender may outsource the loan to a debt collector, which could file a civil lawsuit.

If the lawsuit is successful, the resulting court judgment against you remains public for seven years and can lead to seizure of your assets or garnishment of your wages.

How much can I borrow with a payday loan?

The amount you can borrow varies by your state’s laws and the state of your finances. Most states that allow payday lending cap the amounts somewhere between $300 and $1,000.

This doesn’t mean you’ll be approved for the highest amount allowed by law. A payday lender will consider your income, expenses and payday lending history to determine how much you can reasonably be expected to pay back.

What do I need to get a payday loan?

To qualify for a payday loan you typically need an active bank account, an ID and proof of income such as a pay stub. You must be at least 18.

You can be rejected for a payday loan, despite having income and a bank account, for several reasons, including:

  • You don’t make enough money. Lenders typically require at least $500 monthly net income
  • You don’t meet repayment requirements. States may have specific laws limiting how much of your income you can spend, and each lender may have its own algorithm to gauge the risk you won’t repay.
  • You already have an outstanding loan. Lenders subscribe to a company that can track loans in real time.
  • You are active-duty military. Federal law prevents payday lenders from making short-term loans at more than 36% APR to military members. Some lenders find ways around the law, but others exclude them as customers.
  • You have a recent bankruptcy.
  • You have recent bounced checks.
  • You have not been employed long enough.
  • Your bank account has been opened too recently.