Before visiting your local payday lender, consider the alternatives.
If you’re looking for a small loan, you might be tempted to use a payday lender. After all, they make it look so simple: walk in, provide some basic information, and walk away with the money you need. Payday loan companies never check your credit score or contact credit bureaus (unless you don’t repay the loan as agreed).
And if you live in one of the 37 states where payday loans are legal, you’ll have no trouble finding a physical payday loan office. If you prefer not to leave your home, you can even take out a personal loan online.
Before we do, let’s talk about it.
How payday loans work
Let’s say you want to borrow $300 from a nearby payday lender. They ask to see your ID and proof of income (like a pay stub). There is no credit check. They hand you a contract with about a million words written in fine print.
Their advertised interest rate doesn’t seem that bad. Although the contract they slip across the counter spells out the actual cost of the loan, it’s easy to miss. Pay close attention to the APR, even if you’re in a rush. APR is what you actually pay to borrow money. It includes the advertised interest rate, but also includes a myriad of fees on top of what you owe.
According to the Consumer Financial Protection Bureau (CFPB), the fees added to a payday loan can be difficult to repay. Typically, payday lenders charge a percentage on every $100 borrowed – $15 per $100 is common. So if you borrow $300, immediately add $45 to the amount you owe — before taking into account interests. There are set-up fees, potential late fees, and possibly fees if the lender loads your funds onto a prepaid debit card.
The average “real” rate for borrowing from a payday lender is around 400%. Those hardest hit are those living in states without payday loan protection. CNBC recently revealed which states allow payday lenders to charge the highest APRs:
- Texas 664%
- Nevada 652%
- Utah 652%
- Missouri 527%
- North Dakota 526%
- Mississippi 521%
- Wisconsin 516%
- Louisiana 478%
- Kentucky 469%
- California 460%
- Tennessee 460%
- Alaskan 435%
After you sign the loan documents, the payday lender asks you to write a check for the total amount owed, including interest and fees. They ask you to postdate the check two weeks. Once those two weeks are up, they deposit the check and the funds are debited from your bank account. If you don’t have the money to cover the loan, you must tell them before they deposit the check to avoid overdraft charges.
You may not be surprised that most borrowers are unable to repay their loans in two weeks. After all, they still have rent, food, and other bills to pay. And now they have a loan with exorbitant interest and all sorts of fees.
What happens if you can’t repay your payday loan? The lender will be happy to offer you another loan to pay off the first one.
Let’s say your loan balance of $300 has grown to over $400. You borrow $400 to pay off the first loan, and the lender charges you an additional $60 ($15 for every $100). They are also likely to charge a “rollover fee” of around $45. So, two weeks after borrowing $300, you have a debt of $505 (before interest) — all because you had to take out a second payday loan.
Payday loans are extremely easy to get, but payday loan debt is hard to get out of under it. Because of the way these predatory lenders operate, even small payday loans can be expensive.
With approximately 23,000 payday lenders spread across the 37 states where they operate, you won’t have any trouble getting a payday loan if that’s really what you want to do.
Before writing that post-dated check, consider the alternatives:
Help with bills
There is no shame in running out of funds. Millions of Americans are in the same boat, doing whatever they can to get by. If you’re considering a payday loan because a utility has been cut, the fridge is empty, or you don’t have the money to buy your child’s back-to-school items, help is available. Before signing up with a predatory lender, contact an organization that wants to help you. USA.gov is a great place to start, with information on government assistance, including immediate help with getting food.
Another great resource is Need help paying bills. With an easy to navigate menu on their homepage, Need Help Paying Bills directs you to help with any financial issues you may have. They refer you to help paying utility bills, to food banks in your area, to free job training, and even to free dental clinics. There are few resources as comprehensive as Need Help Paying Bills.
We rarely recommend taking a credit card cash advance, but if you’re in a hurry, it’s better than a payday loan. Let’s say you live in Louisiana and your payday lender charges 478% APR for a short-term loan. Suddenly, paying 35% (or whatever your credit card company charges for a cash advance) sounds like a bargain. It’s not, but if you can plan to pay off the cash advance quickly, you’re in better shape than you would be with a payday loan.
One important thing to remember about cash advances: Interest begins to accrue as soon as you withdraw the money. Go with a plan on how you are going to pay it back in full.
Here are some other ideas for finding money when you need it:
Personal loan. Don’t count yourself if you have bad credit. There are good bad credit personal loans out there, and while some of our favorites charge up to 35.99% interest, that exceeds the interest charges on payday loans. With a personal loan, the interest rate is fixed, and it’s an installment loan, so you know precisely how much your payment will be each month.
Family and friends. It can be difficult to borrow from people you care about, but as long as you’re sure you can pay the money back quickly, it doesn’t hurt to ask.
Box. If you are a member of a credit union, you are considered a member-owner. Credit unions tend to be more flexible with their member-owners, especially if you’ve been with them for a while.
If you decide to take out a personal loan, chances are you will have no trouble finding one. There are nearly twice as many payday lenders in the United States as McDonald’s. Before you do, however, take a close look at some of the ideas we’ve mentioned. When it comes to small loans, almost every alternative is better than payday loans.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.