What Are Payday Loans?
A payday loan (often referred to as a deferred deposit loan or cash advance) is a small-dollar, short-term loan structured to be repaid in a single lump-sum payment when the borrower receives their upcoming paycheck. In the United States, loan balances commonly range from $100 to $1,000, depending on individual state statutory limits.
How the Fee Structure Works
Unlike long-term consumer loans that accrue interest monthly over years, payday lenders generally charge a flat finance charge per $100 borrowed—typically between $15 and $30 per $100.
If an individual borrows $300 for a 14-day duration at a standard rate of $15 per $100:
- Principal borrowed: $300
- Finance fee: 3 × $15 = $45
- Total repayment due on next payday: $345
- Calculated annualized APR: Approximately 391%
The Single Repayment Mechanism
When a payday loan is approved, the borrower grants the lender authorization to initiate an electronic ACH withdrawal from their checking account on the designated payday. Because repayment occurs in one lump sum rather than installments, borrowers must ensure their upcoming paycheck has sufficient funds remaining after rent, utilities, and groceries.
The Dangers of Rollovers & Refinancing
When a borrower cannot afford the full lump sum on their payday, some lenders may offer to "roll over" or renew the loan for an additional fee. Doing so compounds borrowing costs rapidly without reducing the principal debt. Many state financial regulations prohibit or strictly cap rollovers to protect consumers from perpetual debt cycles.
Compare Loan Types
Would spreading payments over several months be easier on your budget? Learn how scheduled payments work in our Installment Loans Guide or read our detailed comparison: Payday Loans vs. Installment Loans.