Are payday loan apps bad for your credit?

Most payday loan apps don’t report to credit bureaus, so they won’t directly affect your credit score. However, if the apps lead to overdraft fees or bounced checks, those could negatively impact your financial health. If you don’t repay, you could be sent to collections, which hurts your credit score. Additionally, because these apps don’t report your payment history to the credit bureaus, even paying your loan on time won’t help your credit history in the long run.

What’s the difference between a payday loan app and a personal loan?

A payday loan app typically offers short-term, small-dollar loans with high fees and automatic repayment within weeks. Personal loans, on the other hand, provide more substantial amounts with longer repayment periods and lower interest rates, making them a better option for larger expenses.

Do payday loan apps lead to a cycle of debt?

Written by

Brittany Wren,

Edited by

Gabriela Walsh,

Reviewed by

Thomas Brock, CFA, CPA,

Expert verified

Published on February 20, 2025 | 4 min read

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Nearly 60 percent of Americans lack enough savings for emergencies, turning payday loan apps into a quick fix for financial stress. These apps offer fast cash with minimal hassle, but their high fees, short repayment terms and automatic withdrawals can quickly trap users in a cycle of debt.

Before relying on payday loan apps, it’s crucial to understand their pros and cons, risks and safer alternatives that promote long-term financial stability.

How payday loan apps work

Payday loan apps, or digital cash advance apps, provide small loans with fast approval and easy access.

These apps allow users to borrow money — sometimes as little as $50 or as much as $500 — with minimal requirements. Typically, borrowers link the app to their bank account, and the loan is automatically repaid on their next payday, making the process simple and fast.

Key features of payday loan apps

Automatic repayment: The loan is repaid automatically once the borrower’s paycheck is deposited into their linked account. Some apps allow borrowers to extend repayment for an additional fee.
Fast funding: Users can receive funds almost instantly or within one business day, depending on the app.
No credit check: Most payday loan apps do not require a credit check, making them accessible to people with poor or no credit.
Small loan amounts: These apps usually allow for small loans, often starting at $50, with limits of around $500 or more, depending on the borrower’s history.

Popular payday loan apps like EarnIn, Dave and Brigit offer users cash advances before their next paycheck without traditional loan processes. However, while they provide quick access to money, the high fees and short repayment windows make them risky for long-term financial health.

Pros and cons of a cash app loan

Before using a payday loan app, weigh the benefits and potential downsides.

Pros

Avoid banks and bank fees: Many users don’t have access to a traditional bank or may want to avoid overdrafts and non-sufficient fund fees, which could translate to an annual rate of 915 percent.
Convenient borrowing: With everything handled through a mobile app, users can request and repay loans without visiting a physical location.
No credit check: Payday loan apps don’t usually require a credit check, which means they’re accessible to a broad range of users, including those with low or no credit.
Quick access to cash: Speed is one of the most significant advantages of payday loans. Users can often receive funds within minutes, making these apps helpful in emergencies.

Cons

High fees: While these apps may not call their charges “interest,” they often come with fees that, when annualized, can resemble extremely high interest rates. For example, a $100 instant loan with a $10 fee might seem manageable, but that translates to an annual percentage rate (APR) of 260 percent or more.
No impact on credit: Although payday loan apps don’t require a credit check, they also don’t help users build their credit. Payday lenders don’t report on-time repayment to credit bureaus, meaning there’s no long-term benefit to using these services responsibly.
Risk of overdrafts: Payday loan apps automatically withdraw funds from a linked bank account when repayment is due. If the account lacks sufficient funds, the borrower may incur overdraft fees, worsening their financial situation.
Short repayment terms: The automatic repayment feature means borrowers typically have just a few weeks — sometimes only days — to repay the loan. They may need to borrow again if they’re still short on funds, starting a vicious cycle.

The danger of a debt cycle

One of the most significant concerns surrounding payday loan apps is their potential to trap borrowers in a cycle of debt. These apps can offer quick relief, but their high fees, short repayment periods and automatic withdrawals often lead users to rely on them repeatedly. Here’s how payday loan apps can contribute to a debt cycle.

High fees and APR

Payday loan apps typically charge a fee for each loan. While the fee might seem small in absolute terms, it can equate to a triple-digit APR, compared to the average 21 percent APR for a credit card. Some payday lenders charge $15 or more per $100 borrowed for a two-week loan term.

Over time, these fees add up, making it harder for borrowers to break free from depending on short-term loans.

Short-term relief, long-term impact

Borrowers often turn to payday loan apps for temporary relief, but the short repayment period can cause financial strain if their circumstances don’t improve before the loan is due. Many borrowers end up taking out a new loan to cover the old one, perpetuating the cycle of borrowing and repayment.

Automated repayment risks

The automatic withdrawal feature is convenient but can backfire. If a borrower doesn’t have enough money in their account when the app pulls the repayment, they might face overdraft fees and additional charges for not paying the loan back on time. This only deepens their financial hole, making it even more difficult to get back on track.

Stress and financial instability

Borrowing repeatedly from payday loan apps can lead to financial stress and instability. Constantly scrambling to cover loan repayments can create anxiety, especially if borrowers feel trapped with no clear way to pay off their debts.

Alternatives to cash advance apps

While payday loan apps may seem like an easy solution, they’re usually not the best option for long-term financial stability. Several alternatives can help you manage unexpected expenses without the high risk of falling into a debt spiral.

1. Personal loans

Personal loans from a bank or credit union generally come with lower interest rates and more favorable terms than payday loan apps. These loans often allow for longer repayment periods and provide the opportunity to build credit if you make payments on time.

2. Credit card cash advances

While cash advances on credit cards also carry high interest rates, they tend to be lower than payday loan fees. Additionally, credit card companies allow borrowers more time to repay, which can ease financial strain in the short term.

3. Employer paycheck advances

Some employers offer paycheck advances, which allow employees to access earned wages before payday. These advances usually come without fees or interest, making them a safer option than payday loan apps.

4. Emergency savings

Building an emergency fund is a proactive way to prepare for financial emergencies. Even setting aside a small amount of money each month can prevent the need to rely on high-cost payday loans.

5. Nonprofit assistance

Several nonprofit organizations provide financial assistance in the form of no-interest loans or grants for individuals in need. The Temporary Assistance for Needy Families (TANF) program offers financial support to low-income families, including opportunities to save in Individual Development Accounts (IDAs) with matching funds This helps recipients cover essential expenses without relying on high-cost loans.

6. Peer-to-peer lending

Peer-to-peer lending platforms like Kiva or Prosper connect borrowers directly with individual lenders. While interest rates vary, these loans often offer better terms than payday loans, making them a viable alternative for those who need quick cash.

The bottom line

Payday loan apps may provide quick relief in a financial pinch, but their high fees and short repayment terms often create more problems than they solve. Instead of relying on these risky tools, consider exploring safer alternatives like personal loans, paycheck advances or building an emergency fund to manage unexpected expenses.

Taking control of your finances starts with making informed decisions. By understanding the risks of payday loan apps and seeking better options, you can avoid falling into a cycle of debt and work toward greater financial stability.If you frequently turn to these payday loan apps, it may be time to reassess your financial plan and explore resources that can help you build more long-term stability.

Frequently asked questions

Most payday loan apps don’t report to credit bureaus, so they won’t directly affect your credit score. However, if the apps lead to overdraft fees or bounced checks, those could negatively impact your financial health. If you don’t repay, you could be sent to collections, which hurts your credit score.

Additionally, because these apps don’t report your payment history to the credit bureaus, even paying your loan on time won’t help your credit history in the long run.
A payday loan app typically offers short-term, small-dollar loans with high fees and automatic repayment within weeks. Personal loans, on the other hand, provide more substantial amounts with longer repayment periods and lower interest rates, making them a better option for larger expenses.