Definition
A small, short-term, high-cost loan that is usually due on your next payday, often with fees equal to an APR near 400%.
What it means
A payday loan is typically a few hundred dollars that you agree to repay, plus a fee, from your next paycheck, often within two to four weeks. The lender usually takes a postdated check or permission to withdraw from your bank account. A common fee of $15 for every $100 borrowed equals an APR of almost 400% for a two-week loan, according to the CFPB. Many borrowers cannot repay on time and renew or roll over the loan, paying new fees each time. State laws differ widely: some states ban payday loans or cap rates, while others allow them. Active-duty service members and their dependents are protected by the Military Lending Act, which caps the cost of most consumer credit at a 36% military APR. Lower-cost options can include credit union small-dollar loans.
Example
Borrowing $400 for two weeks with a $60 fee ($15 per $100) and rolling it over four times costs $300 in fees, while you still owe the original $400.
Illustrative numbers only. Your situation will differ.