Guide · Feb 9, 2022
How Do Payday Loans Work and What Are the Risks?
The real cost, the rollover trap, and cheaper alternatives.
By Michael Gonzales · Last updated
Short answer: A payday loan is a small, short-term loan, usually due on your next payday. The CFPB notes a typical two-week loan charging $15 per $100 borrowed works out to an APR of almost 400%. Many borrowers roll the loan over or re-borrow, which multiplies the fees.
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How they work
- You borrow a small amount, often $500 or less.
- You give the lender a post-dated check or access to your bank account.
- The full amount plus a fee is due in about two weeks.
State laws vary; some states ban payday loans or cap their rates. The CFPB's payday loan resources explain your state's rules and your rights.
The cost
| Borrowed | Fee ($15/$100) | APR equivalent |
|---|---|---|
| $300 | $45 | ~391% |
| $500 | $75 | ~391% |
Rolling over a $500 loan three times can cost $300 in fees with the original $500 still owed.
Alternatives
- Payday Alternative Loans (PALs) from federal credit unions, with capped rates.
- Paycheck advance through your employer.
- Payment plans with the bill you're trying to cover.
- Local assistance programs for utilities, rent or food.
If you're stuck
You can revoke authorization for the lender to debit your account; tell your bank and the lender in writing. A nonprofit credit counselor can help you plan a way out.
Sources
Last reviewed October 12, 2026. This article is general information, not legal, tax or financial advice.
Frequently asked questions
Are payday loans a bad idea?
They're very expensive, with APRs near 400% for a typical loan, and rollovers multiply the cost.
Can a payday lender take money from my bank account?
If you authorized it, yes, but you can revoke that authorization in writing.
What is a cheaper alternative to a payday loan?
A credit union Payday Alternative Loan, an employer advance, or a payment plan with the original creditor.
Written by
Michael Gonzales
Founder & Editor
Michael Gonzales is the founder of Cloudalien Technologies LLC, the company that owns DebtHaus. DebtHaus is not a lender, broker, settlement company or law firm.