What is a 'payday loan'?

A payday loan is identified as a short-term, high-cost loan that is typically due on the borrower's next payday. This type of loan is designed to provide quick access to cash for individuals who need funds to cover immediate expenses, often because of an unexpected financial emergency or gap in their cash flow.

The defining characteristic of payday loans is their short duration and high-interest rates, which can lead to significant costs if the loan is not repaid quickly. Borrowers usually write a check for the amount they wish to borrow plus a fee, or provide access to their bank account for the lender to withdraw the amount plus fees when the loan is due.

This is distinct from types of loans that may involve 0% interest, long repayment periods for major purchases, or loans with no clear repayment terms, which do not accurately describe payday loans or their typical conditions. Understanding this specific nature of payday loans is essential for managing personal finances wisely, especially considering the risks associated with their high costs.