January 20, 2025

What Are the Requirements for a Payday Loan?

It takes just one small emergency to throw your budget off track. Payday loans should be treated as a last-resort option. But if you need that option, how do you apply — and what are the hidden costs?

This guide will walk you through the application requirements for a payday loan, plus the potential risks of this fast-funding solution.

If you’re looking for an alternative, scroll to the end to learn why EarnIn’s Earned Wage Access is a better option.

How to get a payday loan

You’ll sometimes hear payday loans referred to as cash advances or paycheck advances, but the idea is the same: You can apply to receive money quickly and pay it back once your paycheck comes in. So if you’re wondering what you need for a payday loan, the first requirement should be pretty obvious — verifiable income.

But that’s not all. Here’s a basic rundown of what you need to secure this type of funding:

An active bank, credit union, or prepaid card account. Payday lenders need somewhere to deposit your funds so you can access the money.
A way to repay the loan. The lender needs a way to collect funds, usually either a post-dated check or an authorization to debit your account.
Proof or verification of income. This could be a recent pay stub, a benefits statement that shows gross monthly income, or even bank statements showing regular deposits.
Valid identification. To enter into a payday loan agreement, you have to prove your identity and that you’re at least 18 years old.

Simple enough, right? But there’s a catch: Payday loans usually come with extremely high interest rates and fees. So before you pull the trigger, consider other options, like borrowing from friends or family or using an Earned Wage Access solution like EarnIn.

The risks of payday loans

Payday lending can sometimes lead to financial difficulties for borrowers, prompting questions about their legality. While paydays are legal, it's important to understand the potential cost and risk involved.

Excessive fees

Lenders operate with the goal of generating profit, but there is a significant difference in the cost to consumers between traditional installment loans and payday loans. Traditional installment loans typically feature annual percentage rates (APRs) ranging from 7% to 36%, whereas payday loans often carry APRs that can reach or exceed 500%, reflecting the higher costs associated with short-term, high-risk lending.

Many payday lenders don’t present their fees as traditional interest rates. Instead, they might use terms like “finance charges” or a “fee per $100 borrowed.”

Here's how it typically works:

Flat fee. A payday loan lender might charge a flat fee, like $15 for every $100 borrowed. That means if you borrow $300, you'd pay a $45 fee on top of that.
Percentage. Payday lenders might express the fee as a percentage of the loan amount. For example, a 15% finance charge on a $300 payday loan would also result in a $45 fee.

High risk of default

Payday loans typically have very short repayment periods, often as little as two weeks. This can make it extremely difficult for borrowers to come up with the funds in time, especially if an unexpected expense arises.

If you default on a payday loan, substantial late fees may be applied, and interest or additional charges can continue to accumulate until the debt is fully repaid.

Borrowers who struggle to repay a payday loan may feel compelled to take out additional loans to cover the original debt, increasing the risk of entering a cycle of debt. Without a plan to consolidate or repay these loans, borrowers may face negative consequences, such as damage to their credit score. In some cases, lenders may pursue legal action, including wage garnishment or placing a lien on property, as permitted by applicable laws. Clear understanding of loan terms and repayment obligations is essential to avoid these outcomes.

Fewer state laws for consumer protection

Payday loans are regulated at the state level, with significant variation in terms, interest rate caps, and borrower protections. These differences mean that the availability and terms of payday loans depend on the specific regulations in each state. Borrowers should be aware of their state's laws to understand their rights and protections when considering a payday loan.

For example, some states cap interest rates to prevent excessive charges, while others have no limits, allowing for triple-digit APRs. And while some areas limit loan terms to prevent long-term debt cycles, others allow payday lenders to extend loans with less favorable terms.

This patchwork of laws also affects protections like cooling-off periods between payday loans, restrictions on rollovers (extending a loan with added fees), and the clarity of disclosures payday lenders are required to provide. Before applying for a payday loan, do your homework to understand your rights within your state.

Frequently asked questions

Still not sure if this type of loan is the right choice for you? Here’s more information.

Are payday loans illegal?

Payday loans are legal in most states, but the regulations governing them vary widely. Some states have strict laws that cap interest rates and limit loan terms, while others have fewer restrictions.

The Consumer Financial Protection Bureau (CFPB) provides oversight and guidance on payday lending at the federal level, working to prevent unfair, deceptive, or abusive practices. But there’s still work to be done to make payday lending less predatory. Research your state's specific laws to understand the legality and regulations surrounding payday lending in your area.

How much do payday loans cost?

The cost of payday loans varies significantly depending on the lender, the amount you borrow, and your state's regulations. But these seemingly small loans are generally very expensive, with finance charges that often equate to an interest rate of 400% or higher. Use a loan calculator to estimate the total cost of a payday loan before you commit.

What are payday loan borrowing terms?

Payday loan borrowing terms are typically very short, often ranging from two weeks to a month. This means you need to repay the loan plus finance charges by your next payday. The short repayment period can make it challenging to repay on time.

How do you repay a payday loan?

Repayment methods for payday loans typically depend on how you got the loan. Just make sure you have sufficient funds in your account on the repayment date to avoid overdraft or returned check fees.

In-store loans

Borrowers who secure payday lending through a physical storefront usually repay the loan at the same location. That doesn’t necessarily mean you have to go back in to pay back the debt. Many payday lenders ask for a post-dated check during the application process, which they then cash on the due date.

Online loans

For online payday loans, you usually authorize the lender to electronically debit the repayment amount from your bank account on the due date.

What are some alternatives to payday lending?

If you’re faced with a financial emergency and need quick cash, consider payday loan alternatives before resorting to this high-risk funding option.

Borrow from friends or family. Ask trusted friends or family members for a short-term loan. Just set clear repayment terms to avoid unnecessary conflict.
Use an Earned Wage Access app. With an app like EarnIn, you can get early access to the wages you’ve already earned instead of taking out a small loan.
Negotiate with creditors. If you're struggling to pay bills, contact your creditors to explain the situation and request a payment plan or extended due date.
Consider a personal loan from a bank or credit union. Traditional consumer loans typically have lower interest rates and longer repayment terms than payday loans.
Seek assistance from a nonprofit credit counseling agency. A financial nonprofit could provide guidance on budgeting, debt management, and helpful resources.

Remember, the large finance charges and potential risks of payday loans make them a last resort. Always explore alternative options before resorting to things like cash advances and payday lending, even for a small loan. The cycle of debt isn’t worth it.

Try EarnIn: A safer way to access money

Need cash before payday but want to avoid sky-high fees? EarnIn’s Cash Out tool lets you access your pay as you work with no interest, no credit check, and no mandatory fees. Get up to $150/day with a max of $750 between paydays. With EarnIn, there’s no need to take on the risk of a costly cash advance or payday loan. You have access to your own money to keep moving forward, whatever life sends your way.

Download EarnIn now to make every day payday.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

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