A payday loan is a short-term, high-interest cash loan for the amount of your next paycheck. In the past, the only way you could receive a payday loan was by visiting a payday or cash advance lender. You would then follow this process to secure a loan:
- Request a loan amount.
- Write a post-dated check for the loan amount plus interest and fees.
- Receive your loan funds in your bank account.
- Authorize the lender to cash the check on your next payday or the post-dated check date.
Payday loans are typically much easier to acquire than other loan types, as the post-dated check acts as security that guarantees repayment. Payday lenders typically require very few qualifications of borrowers. As such, even those with low income and poor credit scores can often qualify for payday loans.
Today, many lenders use the term “payday loan” interchangeably with “personal loan.” However, the lenders and marketplaces on our list can allow you to receive a loan for more than the amount of your upcoming paycheck. Additionally, you typically do not have to provide a post-dated check to receive these loans. For these reasons, you can think of a payday loan as a more general cash loan.
Understanding Payday Loan Rates and Fees
Personal lenders charge various fees and interest rates depending on the exact loan you take out. Many lenders adjust their costs based on your:
- Credit score
- Credit history
- Repayment history
- Loan amount
When a lender offers you a payday or personal loan, it will lay out your loan terms clearly to ensure that you know ahead of time how much interest you will pay on your loan amount. Typically, online personal loans can charge APR varying from 5.99% to 35.99%. If you aren’t familiar with loans, you may not understand what these percentages mean.
Let’s say you receive a loan for $2,000 from an online personal lender. The terms state that you must make monthly payments on the loan and repay it within 12 months. Additionally, your APR (or Annual Percentage Rate) is 24%. It is calculated monthly and added to your monthly payment. In this example, your required monthly payment will be $189.12, and at the end of the 12 months, you will have paid a total of $2,269.44 for your $2,000 loan.
Some lenders also charge origination fees, which increase your overall loan costs. In general, you can expect that the lower your credit score is, the worse your terms will be.
Requirements for Getting a Payday Loan Online
Every lender has different requirements that its borrowers must meet to qualify for a loan. However, as we have mentioned previously, payday loans and other short-term cash loans tend to have fewer requirements than traditional loans.
Generally, you must at least meet these minimum requirements to receive a payday loan online:
- Be 18 years or older
- Have a checking account
- Have a valid ID and proof of income
Some lenders require that you have a minimum monthly income, such as $1,000, to qualify for a bad credit loan. Others only lend to US citizens. However, in general, payday loans are relatively easy to qualify for, with many lenders approving your application in a matter of minutes.
Alternatives to Payday Loans
Payday loans are not always the smartest option when you need fast cash. If you cannot come up with the money you need now, you may not be able to come up with it in a few weeks when the lender cashes your post-dated check or calls your loan due, leading to an endless cycle of debt.
We recommend considering all of your options before jumping into a payday loan if you’re short on money. In the best-case scenario, you want to be able to repay your loan without any issues and move forward without relying on more loans to help you repay your debts.
Here are a few payday loan alternatives to consider if you need emergency cash.
Auto Title Loans
An auto title loan is a personal cash loan that uses the title to your car as collateral. This alternative to a payday loan can have fast processing times, allowing you to receive your funds in just a few days.
Auto title lenders typically offer loans ranging between 25% and 50% of the value of your vehicle. However, some lenders may allow you to borrow up to $10,000 through an auto title loan.
The loan process for an auto title loan is simple:
- Apply for the loan
- Gain approval from the lender
- Give the loan provider the title to your vehicle
- Receive the funds in your bank account or as cash
- Repay the loan in the specified loan term, along with interest and fees
If you cannot make your loan payments on time, the lender may offer for you to roll your loan over into another loan, leading to a cycle of debt that is difficult to escape. Alternatively, the loan provider could acquire ownership of your vehicle by claiming your car title.
Because these loans use your car title as collateral, most auto title lenders have generous qualification terms. You may be able to qualify for this short-term loan type if you have a bad credit score or no credit history.
However, we do not recommend taking out a title loan unless you are sure that you can repay your loan on time. These loans can be expensive and difficult to manage, especially when you begin taking out more loans to pay back your initial one. Many borrowers have lost their vehicles this way.
Pawnshop loans are short-term cash loans that utilize an item you bring to the pawnshop as collateral. The process to acquire this secured personal loan is typically as follows:
- Visit a pawn shop with a valuable item in hand, such as jewelry, electronics, or guns. Be sure to bring your ID as well.
- Wait for the pawnbroker to appraise your item. You can typically qualify for a loan amount equal to between 25% and 60% of the value of your item.
- Receive your cash loan.
- Repay the loan in the designated period. If you do not repay your short-term loan on time, the pawnbroker has the right to sell your pawned item.
Most pawn loans do not require you to meet a minimum credit score or any typical loan qualifications. Your pawned item will act as security to ensure that the pawn shop receives back the funds it loaned you.
Pawnshops can charge varying fees and interest rates on pawn loans, making these loan types relatively expensive. Depending on your state, pawnshops can charge anywhere from 2.5% to 25% interest on your loan each month. As with auto title loans, if you cannot pay your pawnshop loan on time, the shop may offer you a rollover loan that increases your overall costs.
Peer-to-Peer Lending Sites
If you’d prefer not to borrow from one of the online lenders on our list, another option to consider is peer-to-peer (P2P) lending sites. These sites match borrowers with people or businesses who want to loan money. Most P2P lending takes place on designated online platforms that follow responsible lending practices.
To obtain a P2P loan, you can typically follow this process:
- Submit an application on the online P2P platform.
- Receive a rating from the platform that indicates the type of loan you can qualify for.
- Wait for lenders to review your loan application.
- Accept a loan offer from a lender.
- Make monthly payments to the lender.
Even though P2P loans follow a slightly different lending process than other installment loans, they still have similar repayment processes and qualification terms. If you have a low credit score, you may only qualify for a loan with a higher interest rate. In some cases, a poor credit rating may prevent you from qualifying for a P2P loan altogether.
However, if you have good or excellent credit, P2P loans can sometimes offer even better terms than what you could find through a bank or credit union. Such a loan could save you money when borrowing small amounts in the short term.
Credit Union Loans
Credit union loans are a popular alternative to borrowing from a bank. These loans typically have low interest rates and flexible repayment terms, making them generally more favorable than payday loans.
Many credit unions offer both secured and unsecured personal loans. You typically need to be a member of a federal credit union to qualify for a loan. However, many credit unions allow you to join online with a small one-time membership fee.
Many borrowers choose to borrow through a credit union because these entities consider your whole financial picture when determining your loan eligibility. Even if you have a bad credit score, you may still qualify for an unsecured loan if you can show your financial responsibility to the credit union in other ways.
Federal credit union loans tend to have lower APR than other personal loans, with the average APR for credit union loans sitting around 8.86%. However, credit unions typically perform a hard credit check when reviewing your application, compared to online lending networks, which tend to perform a soft credit check.