Payday Loan
A short-term, high-cost loan typically repaid in full on the borrower's next payday.
What is Payday Loan?
A payday loan is a small, short-term loan — typically $200–$500 — designed to cover expenses until the borrower's next paycheck, usually due within 2–4 weeks. The fees are steep: a $15 fee per $100 borrowed translates to a 391% annual percentage rate (APR) on a 2-week loan. Payday loans are marketed to consumers with limited access to traditional credit, but the combination of short terms, high fees, and automatic repayment from the borrower's bank account creates a debt trap — the CFPB found that over 80% of payday loans are reborrowed within 14 days. Many states cap or ban payday loans; federal regulations require APR disclosure.
Example
A borrower takes a $400 payday loan with a $60 fee, due in 14 days. The 391% APR makes this one of the most expensive forms of credit available. If the borrower cannot repay in 14 days and rolls the loan over, they pay another $60 fee — spending $120 to borrow $400 for a month. Alternatives such as credit union payday alternative loans (PALs), credit card cash advances, or negotiating directly with creditors are typically far less expensive.