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Payday loans are geared to people who need cash quickly. For their convenience and minimal credit requirements, these loans charge high interest rates and fees and have short repayment terms. While a payday loan may solve an urgent need for money in an emergency situation, it's important to consider your options before approaching a payday lender.
Here's what you need to know about payday loans and how to find more affordable options.
What Is a Payday Loan?
A payday loan is a short-term loan that offers immediate access to cash at an amount usually around $500 or less. These small-dollar loans can charge fees equivalent to triple-digit annual percentage rates (APRs), and have short repayment terms—typically 14 days. Payday loans are unsecured, meaning they do not require collateral.
You can get a payday loan in person from a local loan agency, but many payday lenders now operate online. With a physical branch, you'll leave a post-dated check with the lender or pay the loan off in person. Online payday lenders collect your banking details so payments can be made directly from your account.
Should You Avoid Getting a Payday Loan?
The top reason people avoid payday loans is their cost. Payday loans typically carry finance fees of anywhere from $10 to $30 for every $100 borrowed, which can equate to an APR of 400% or more. For instance, if you get a payday loan for $500, and you have a $15 per $100 fee, you'd owe $575 at the end of your term (which translates to a 391% APR). This can make it difficult for some to pay the entire loan back on time as agreed.
In states where rollover loans are allowed, a lender may let you pay the fees only and roll over the principal into another loan if you can't pay it off by the due date. But this new loan will come with additional fees and you'll still owe the principal amount from the last loan.
In addition to very high interest rates, a lender may be able to charge late fees, rollover fees, returned payment fees or prepaid debit card fees. The loan agreement should have a fee schedule you can reference before getting a loan.
Payday Loan Laws and Protections
Because of the high finance fees, some borrowers struggle to pay back their original loans, and end up taking continual rollover loans. This can send borrowers into a cycle of dependence on payday loans that's hard to break, especially if they were already living paycheck to paycheck before the loan.
In response, some states have passed legislation to either ban payday lending or put restrictions on lending terms, including caps on fees and loan amounts. In some states, payday lenders must offer a payment plan if a borrower falls behind on their payments.
If you feel as though you've been deceived by hidden fees or other deceitful practices, you can contact your state consumer protection office or the Federal Trade Commission's fraud department. However, the FTC doesn't resolve individual complaints, so the best course of action you can take is to proceed cautiously or consider other loan options instead.
Consider These Options Before Taking Out a Payday Loan
There are several alternatives to payday loans that could help you cover your cash needs. Here are some options that can help you when you're in a financial bind:
- Payday alternative loans (PALs): Payday alternative loans are often offered by federal credit unions. These short-term loans come with more reasonable terms and fewer fees than payday loans.
- Credit cards: Credit cards may charge high interest, but it likely won't be as high as a payday loan's fees. Some credit cards also offer installment or pay over time plans for a small fee. You may also be able to tap some of your available credit in the form of a cash advance. Just be sure to pay off the advance as soon as possible, as you'll pay a higher rate on cash advances.
- Personal loans: These unsecured loans can come in many sizes, and the amounts depend on the type of loan that you choose. Typically personal loans have terms of 12 to 60 months or sometimes longer.
- Loans from family or friends: This option can be a huge help if you find yourself in a tough financial situation. However, it could put a strain on your relationship, so it's a good idea to create a loan contract to give your friend or family member peace of mind that the debt will be repaid.
- Assistance programs: Some organizations offer subsidized housing or utility payments, direct cash assistance or even rent relief. They may also provide access to legal experts who can help you understand and advocate for your rights as a consumer.
- Home equity line of credit (HELOC): A HELOC is a revolving line of credit that's secured by the equity you have in your home. If you already have one in place, you may be able access that credit line by simply using a debit card or writing a check.
- Selling unwanted items: If you have items of value you no longer need, consider selling your items online to earn money quickly.
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The Bottom Line
Payday loans may seem like an easy way to get cash fast, but they come with a high cost. Explore your other options like taking out a payday alternative loan or borrowing money from family or friends. A little creativity and budgeting can help you avoid the payday lending cycle and get you closer to your financial goals.
If you have no other choice but to get a payday loan, make sure you understand the loan terms and make budget adjustments so you can pay it off as quickly as possible. Working to improve your credit score can also help you to qualify for more affordable credit products down the line. Experian offers a variety of free resources, including access to a free credit score and ongoing credit monitoring.