The Truth about Payday Loans
If you’re in a tough financial spot and need cash now, you might find yourself looking into how to get a payday loan.
A payday loan can give borrowers quick access to cash through an advance on a future paycheck. However, payday loans can also be tricky to manage and can quickly become too expensive or unaffordable.
Before you jump into a payday loan, you should know what they are and how they work — here’s the truth about payday lending.
What is a payday loan?
A payday loan is a small, short-term loan that offers a borrower a way to get quick cash. Payday loans typically have a few defining features:
- Secured by access to your checking account funds. Most lenders will require that you write a post-dated check or authorize them to debit your account, giving them direct access to money in your checking account.
- Repaid over a short term. A payday loan is named this way because many lenders will make the loan due on the borrower’s next payday, though payday loan lengths can vary from 14 days up to 6 months.
- Repaid in a single lump sum. Unlike installment loans that you pay back over several months, a payday loan is usually repaid in a single payment. Upon the due date for a payday loan, the borrower agrees to repay the full amount borrowed.
- Borrowers will pay a financing charge. Payday loans usually charge a financing fee that is usually due along with the rest of the payment. This is usually charged as a flat rate of $10 to $30 per $100 borrowed, per the Consumer Financial Protection Bureau.
These finance charges result in an average payday loan APR of 391% according to the Center for Responsible Lending. But payday loan laws vary in each state, and so do costs — typical payday loan APRs range from 154% on the low end up to 677% in some states.
Not every borrower who takes out a payday loan can afford to repay it on their due date. Because of this, many payday lenders allow borrowers to “rollover” or renew their loan, paying an additional finance charge to buy more time to repay the loan. This can keep the borrower in debt longer than expected and result in finance charges that quickly add up.
Here’s an overview of the average payday loan:
|Average payday loan terms and fees|
|Average payday loan terms and fees|
|Initial repayment period||14 days|
|Total time to repay payday loan||5 months|
|Total financing fee||$520|
|Source: The Pew Charitable Trusts|
Should you get a payday loan?
Payday loans are popular among borrowers with poor credit, as lenders usually don’t check an applicant’s credit before approving the loan.
Payday loans are also commonly used by low-income borrowers who earn $30,000 per year on average, according to The Pew Charitable Trusts. These borrowers often struggle to keep up with monthly expenses, and most payday loan recipients use those funds for ongoing living costs such as housing.
Because payday loans are used by these borrowers who often can’t access forms of credit, many defenders of payday lending say that these types of loans provide an important source of funds. For many people, a payday loan can be worth the high APR if it helps them cover vital costs, such as keeping up with rent or covering payments on a car used to get to work.
The dangers of payday loans
But the way payday loans are structured can cause a few issues that can get and keep borrowers into more debt than they can afford. Here are some drawbacks of payday loans.
- It’s too easy to borrow. Payday loans can make it all too easy to take on more debt than you can actually pay back and straining an already-tight budget.
- You only have a few weeks to repay the debt. Think carefully about whether you can realistically afford to do repay the payday loan all at once in just a couple of weeks.
- You’ll pay more to borrow with a payday loan. The average payday loan APR is 391%, while a typical higher credit card APR is 25%. Borrowing $375 costs $55 with a payday loan due in two weeks, or $110 per month — the same debt would cost just $7.81 in monthly interest on a credit card at 25% APR.
- Payday lenders can access your account. They can withdraw the funds you owe from your account before you have a chance to use it for other expenses, giving you less control over when and how to cover your bills.
- If you can’t repay the loan, you’ll face late fees. A lender will attempt to withdraw the funds you owe when the payday loan is due. If you come up short, you can face late fees, returned payment fees, or non-sufficient funds fees.
- Payday loan rollovers keep you paying. It gives you more time to pay off a payday loan, but keeps you on the hook and paying out fees without lowering what you owe.
The bottom line is that payday loans are an expensive way to borrow. While they can provide temporary relief, the high costs will often set back borrower’s finances even further and can even push them into a cycle of borrowing and repaying payday loans. For most borrowers, it’s better to find alternatives to payday loans or even take a financial hit if it means staying out of payday loan debt.
How to get quick cash when you need it
Sometimes people need quick cash, and payday loans can be an option to get it. If you decide to get a payday loan, however, you’ll need to proceed with caution.
How to get a payday loan
Here’s how to get a payday loan while protecting yourself from predatory lending practices:
- Check payday loan laws in your state. Some states don’t allow payday loans, while others have strict rules about these loans. Use this summary of state statutes about payday lending from the National Conference of State Legislatures to see what rights and protections your state grants you.
- Only borrow what you’re positive you can repay. If you’re iffy about your ability to pay a payday loan back, don’t move forward— look for other options.
- Shop around. Don’t default to borrowing from whichever payday loan storefront is closest. Look around at banks, credit unions, and online lenders to see if they offer payday or similar small-dollar loans.
- Compare costs. As you’re looking for payday loans, compare costs and terms to find a payday loan that’s low cost and fair.
- Carefully read your contract. Make sure you know what you’re signing up for, and what will happen if you become unable to repay the loan. Watch out for potential late fees or other costs, as well as terms around rollovers.
Alternatives to payday loans
Of course, they aren’t the only way to get fast cash. Consider these other options before turning to a personal loan.
Use savings. If you can tap cash, you can cover your costs without paying an interest or financing costs. Of course, you’d need to have savings to use them, and more than half of people don’t have enough saved to cover an emergency costing $1,000 or more. If you do, however, it’s one of the safest and most affordable ways to cover emergency costs.
Generate extra cash. See if you can quickly generate some extra cash to cover your costs. Check your home, garage, and storage areas for items you can afford to sell. You can try to pick up extra hours at work, get a second job, or work some side gigs to make more money.
Seek a different credit vehicle. If you can access other forms of credit, you might have more time to repay the balance — and you’ll pay far less in interest. One drawback: most lenders will check your credit when deciding whether to approve your credit application. But there are options out there even for applicants with bad credit.
Here are some borrowing options that could be better than a payday loan:
- Applying for a personal loan
- Check credit unions for payday alternative loans
- Taking out a credit card cash advance
- Using cash advance apps
- Borrow from family or friends
How to get out of payday loan debt
If you ultimately decide to take out a payday loan, or you’ve already done so, and you’re feeling stuck in the borrowing cycle, don’t panic. You can take action to get ahead of your debt and pay off your payday loans once and for all.
First, stop digging the hole any deeper. Commit not to borrow any more payday loans and avoid rolling over a payday loan you already have.
Look for extra money you can use to get rid of your payday loan. You might have to cut down to a barebones budget for a while or pick up another job to earn some extra money. But the sacrifices will be worth it to find the money needed to pay off the payday loan.
Ask your lender about your options, too. Many payday lenders are required to offer extended repayment plans that allow you to pay off this debt in smaller amounts. You can also consolidate debt, combining payday loans and other debt into a single, fixed monthly payment.
Some borrowers might benefit from the added support of working with a debt relief service, too. For a fee, these companies can help you manage your debt and repay it in an affordable, manageable way.