What Are the Downsides of Payday Loans?

Takeaways About Payday Loans:

• On average, payday loans have higher fees than other types of loans, like personal loans.
• Typically, they have a less competitive annual percentage rate (APR) than many other loans.
• They have limited repayment windows and amounts.

How Does a Payday Loan Work?

A payday loan is a short-term loan you must usually repay by your next payday. These unsecured loans don't require offering your car or other property as collateral.

Payday Loan Application Process

Payday lenders often have lower loan requirements than traditional personal loans. For example, getting a payday loan may appeal to someone who has been turned down for credit in the past year or has already maxed out other credit cards.

Consumers may find the loans through online lenders or at storefronts.

Loan requirements may include: 

• Being at least 18 years old.
• Valid identification.
• An active checking account with a bank or credit union.
• Proof of income from a job or another source.

If you are approved for a loan, this is the typical process:

1. You give the payday lender a post-dated personal check to cash on your next payday, in about two weeks, or your authorization to deduct the loan amount from your checking account. The total will be your loan amount plus any fees.
2. The payday loan is deposited into your bank account or onto a debit card, or you can pick up cash at the storefront.
3. You repay the loan in one lump sum by the deadline, typically whenever your next paycheck arrives, or immediately after. The lender will cash your post-dated personal check or electronically debit repayment funds from your bank or credit union account.
4. In some states, you can renew or extend the loan for another fee. If you can't repay the loan, in some states like Washington, the loan can be converted to a term loan that you repay. However, if you don't repay the loan by the deadline and your deposited check was returned unpaid, the lender can charge an additional one-time $25 fee (PDF).

What Are the Problems With Payday Loans?

Short Repayment Window

Payday loans typically have a short window for repayment. In Washington, you must repay the original loan balance within 45 days, according to the Washington State Department of Financial Institutions. Some lenders may require you to repay the loan in a faster time frame. In contrast, most traditional personal loans allow you to stretch out your repayment over time with equal installments.

Limited Amounts

You may only be able to borrow a small amount, typically with maximums ranging from $500 to $700. This is known as your initial loan limit. Your loan approval and limit will be based on your income and state guidelines.

Washington law limits you to borrowing whichever is less — $700 or 30% of your gross monthly income. You're also limited to no more than eight payday loans in the previous 12-month period.

Confusing Fees and Interest Rates

Most payday loans charge flat loan fees, which makes it hard to compare them to other types of loans that charge an annual percentage rate.

However, payday lenders are legally required to calculate and disclose how the total for the loan and fee equate to an APR, which might make it a little easier to compare costs between different lenders and loans.

The total cost of your payday loan depends on several factors:

• Amount: You may be charged higher or lower fees depending on the amount.
• Timing: Shorter repayment periods can be more expensive.
• Your state: Each state sets interest rate caps for payday loan interest rates.

Washington state statute says payday lenders can charge a fee of 15% on the first $500 and another 10% for amounts over $500. However, these fees and percentages are not the APR.

The table below shows examples of fees allowed by Washington state statute and the equivalent APR, rounded to the nearest percent. You can see how the equivalent APR changes with the amount you borrow and the length of your repayment period.

How to read the table below: The first column of the table shows a loan amount of $100 with a $15 fee, which is 15% of the loan amount and the maximum fee allowed in Washington.*

If you pay back the $100, plus the $15 fee:

• In seven days, you'd be paying the equivalent of 782% APR.
• In 14 days, you'd be paying the equivalent of 391% APR.
• In 30 days, you'd be paying the equivalent of 183% APR.
• In 45 days, you'd be paying the equivalent of 122% APR.

For comparison, 11% APR was the average for credit union personal loans with a 36-month loan term as of March 28, 2025.

Additional Fees

Payday lenders might charge you additional fees, depending on what your state allows.

Additional fees may include:

• Repayment plan fees for setting up a plan to repay your loan.
• Renewal or rollover fees to renew or extend the loan and extend the loan's due date.
• Late fees or NSF fees for making late payments or payments that don't go through due to insufficient funds in your bank account.
• Prepaid debit card fees if your loan is loaded onto a prepaid card — this card may have various associated costs, including fees for calling customer service or checking your account balance.

Debt Trap

In states allowing payday loan rollovers, you can pay a fee and avoid repaying your loan by the deadline. But you still owe the original amount. If fees pile up, paying off your loan could become increasingly difficult.

Some states impose strict regulations and don't allow loan renewals or rollovers. In Washington, you can't renew a payday loan. Instead, the state requires lenders to offer you an installment repayment plan that lasts at least 90 days for loans of $400 or less. For loans of $400 or more, repayment plans must last at least 180 days.

Credit Damage

A payday lender could send your loan to a collection agency if you don't repay your loan or your postdated check bounces. This may be reported to the credit bureaus and could hurt your credit score.

However, payday lenders don't usually request your credit report or score from one of the three credit bureaus as part of the loan approval process. In addition, payday borrowers' payments aren't typically reported to the credit bureaus, so you won't earn a higher credit score even if you pay it off on time.

Payday Loans Have Some Benefits

While the costs of payday loans are often high and the downsides are many, payday loans can be appealing as a last resort. But use caution to avoid bigger financial problems in the future. Here are a few benefits:

• No credit check required: Payday loans may be one of the few options available if you have bad credit or no credit, and if don't have a car or home to use as collateral (property used to get a loan). The 2023 Washington state statistics show that 36% of payday loan borrowers are between the ages 18-34, an age group that may have no credit score or a shorter credit history.
• Fast cash: Typically, within a day or so of application, you can receive cash, money on a debit card, or a direct deposit to your checking account.
• Manageable fees — if you pay it back on time: The flat fees could be minimal if you can repay the loan on time.
• Any use: The money can be used for any purpose; according to some research, the most common reasons for alternative loans like payday loans include paying utility bills, general living expenses, rent, and at times, a financial emergency or lost income due to job loss.

Alternatives to Payday Lenders

Ask your bank or credit union about short-term loans. Your financial institution may allow you to borrow money (typically under $1,000) without collateral.

For example, federal credit unions may offer small unsecured loans called payday alternative loans. Some state-chartered credit unions also offer similar small-dollar loans. BECU does not offer payday alternative loans, but does partner with Express Credit Union, which offers Member Advance Loans of up to $1,000 for a 10% flat fee.**

Other alternatives to payday loans include the following, although they also have pros and cons:

• Borrowing money from friends and family: Write up the terms of your loan to ensure expectations are clear.
• Buy now, pay later: These widely available installment loans don't charge interest, but may charge late fees.
• Personal line of credit: Available from some banks or credit unions without collateral.
• Payment plans: Some furniture stores or other businesses offer payment plans or layaway, as may utility companies.
• Credit card cash advance: Borrowing money from your credit card can be fast, and interest rates are likely lower than payday loans. You may also pay fees (BECU does not charge fees for credit card cash advances (PDF), which are limited to 40% of your overall credit card limit).
• Title loans: These loans rely on signing over the title for your paid off vehicle until you repay the loan. However, non-repayment could lead to your car or truck being repossessed.
• Installment loans: Personal loans are a type of installment loan (PDF). These loans consider your ability to repay borrowed money, have equal monthly payments and are reported to credit bureaus.

A Pew survey (PDF) asked borrowers to suggest what they might do if payday loans weren't available and extra money was needed. The participants suggested some of the above alternatives, along with others like:

• Selling personal possessions.
• Cutting back on expenses.
• Delaying bill payments.
• Requesting a cash advance from an employer.

Final Word: Protections in Washington and the Payday Lender

If you need financial relief and must turn to a payday lender because you have no other choice, avoiding hefty fees and understanding your options is essential.

The Washington Department of Financial Institutions offers these suggestions to payday loan borrowers:

• Ensure the lender is licensed by the Department of Financial Institutions (or your state's equivalent).
• Investigate alternatives, such as borrowing money from family.
• Shop for loans and compare fees and terms.
• Don't borrow from more than one lender.
• Borrow only what you can repay.
• Schedule full payment of your entire loan amount.
• Create a budget to avoid money gaps and emergency borrowing.

You can review your budget, debts and financial options with a counseling service like GreenPath credit counseling. GreenPath's counselors offer free financial advice on managing debt and debt consolidation.

BECU members can take steps to avoid using payday loans by signing up for a free Financial Health Check for help with increasing savings, reducing debt and organizing finances.

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