What you need to know about payday loans

Payday loans are small loans with high fees that typically have to be paid off in 14 days.

People typically choose payday loans because they're easy to qualify for and funds are available quickly, but the terms make them incredibly risky.

Many states restrict or ban payday loans because they can lead to severe financial problems if they aren't paid off on time.

If getting money quickly is a priority, you might not have the time to think whether the easiest option is a good idea — and that's exactly what predatory lenders are counting on. Payday loans are unsecured personal loans that allow you to borrow a small amount with a short repayment term. All you need to qualify is proof of income.

They can be tempting if you urgently need money before your next pay period. The bad news: You're very likely to get trapped in a toxic cycle of debt with an annual percentage rate (APR) of 400% or more. Since many borrowers often roll over their loan balances with additional fees, they often end up in worse financial shape.

It's critical to understand how these loans work and find alternatives so you don't end up in an endless cycle of payday loan rollovers.

What are payday loans and how do they work?

Payday loans are small loans, usually $500 or less, that are repaid within 10 to 14 days. Rather than a traditional interest rate, lenders have a set finance charge that often leads to a triple-digit APR.

That makes them difficult for most people to repay on time, and as a result, payday loans are notorious for high rollover rates. Refinancing, or rolling over, the loan triggers additional fees, which can make a bad financial situation worse. The debt balloons over time, far exceeding the initial balance.

Check if payday lending is legal in your state

Payday loans are regulated at both the federal and state level, and many states have laws that limit the loan amount, fees or rollover costs interest rates payday lenders can charge. Others have banned payday loans entirely because of the high costs and predatory nature of these products.

Rather than interest, payday lenders generally charge a flat fee that ranges between $10 and $30 for every $100 borrowed, based on findings from the Consumer Financial Protection Bureau . These fees can add up quickly. Across the 30 states that allow payday loans, consumers pay more than $2.4 billion in fees annually, according to the Center for Responsible Lending .