More than 12 million Americans a year take out payday loans: small-dollar, short-term loans that provide borrowers with cash that is usually due to the lender by the date they receive their next paycheck. Despite payday lenders commonly framing these loans as solutions for unexpected expenses, most Americans who take out payday loans use them to cover regular bills, like rent and utilities.
Unlike other loans, borrowers don't need a credit score to get a payday loan—they just need a valid ID, proof of income, and a bank account or prepaid card. Often capped at $500, the average payday loan is about $375.
Interest rates on these loans are usually high—the typical annual percentage rate on a payday loan is about 400%. However, these loans are usually only intended to last until the borrower's next paycheck rather than a full year. So for a two-week loan, that APR roughly equates to borrowers paying between $10 and $30 per $100 borrowed.
Roughly 80% of payday loan borrowers either default or roll over their loans—increasing the total amount they have to pay. Critics argue that payday loans are inherently predatory, pointing to their high interest rates and other common industry practices that keep low-income consumers trapped in debt. Supporters of payday lenders argue that without them, unbanked individuals and many people living in poverty would have a tough time accessing cash when they need it.
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If borrowers can't pay back the loan, they can be subject to overdraft fees from their bank and other fees from the payday lender—further exacerbating the debt borrowers face.
In the early 1900s, unlicensed "salary lenders" used to give consumers one-week loans at annualized percentage rates of more than 100%. But wage garnishment and financially abusive practices led some states to create special licenses for lenders and implement rate caps to protect consumers. In the 1990s, a series of deregulations in various states opened the door for the modern payday lending industry to take off.
That's according to a 2023 Federal Reserve survey. So what does the average American in this camp do when, say, their car breaks down? This video compares six of the most common ways Americans get money when they don't have it. As it turns out, some of them opt for payday loans, which this video argues are predatory.
Payday lenders typically make money via finance charges, a percentage or dollar amount that the borrower owes the lender per $100 borrowed. While the finance charge can range from $10 to $30 for every $100 borrowed, this would equate to an annual percentage rate of almost 400 percent for a two-week loan.
Laws regulating predatory lending are called usury laws and vary from state to state. Payday lending has historically been exempt from some states' usury laws, and some lenders have found loopholes in state laws or business structures that allow them to provide short-term loans with high interest rates.
Federal law treats payday lending like other lines of credit, meaning it requires lenders to disclose the loan's interest rate and its "finance charge," a dollar amount expressing the full cost of the loan. But states have their own regulations around payday lending, hence why it isn't allowed in every state and why the industry looks so different across the country. These regulations are often part of a state's usury laws.
In 2001, the North Carolina state legislature let a 1997 law that permitted the small-dollar loans expire—effectively banning payday loans. In 2005, the NC bank commissioner ruled that Advance America, a payday lending company, had been operating in the state illegally.
Despite common criticism that payday lenders take advantage of uninformed borrowers, some people who take out payday loans know they are usually a bad deal, but often feel like they don't have any other options. Payday loans are often considered a symptom of poverty. (Some users may experience a paywall.)
In 2024, people in Houston took out payday loans at a higher rate than the national average. In Texas, the average payday loan interest rate is 664%.
Check Into Cash Inc. is widely recognized as the first national payday lending company. Originally started by a preacher in Johnson City, it was later popularized by Allan Jones, who founded Check Into Cash in 1993. Jones has since donated a significant amount of money to the city. (Some users may experience a paywall.)
The United States is home to more than 33 million businesses, the vast majority of which are small businesses, with millions being created (and others closing shop) every year. These businesses often rely on loans, provide the goods and services that keep the economy flowing, and sometimes even grow large enough to enter public markets or provide private investment opportunities. Explore key topics central to business and finance, from the role of the Federal Reserve to how initial public offerings work, how millions of American students finance higher education, and more.