Before you visit your local payday lender, consider the alternatives.
If you’re looking for a small loan, you may be tempted to use a payday lender. After all, they make it seem so easy: Walk in, provide some basic information, and walk away with the money you need. Payday lending companies never check your credit score, and make no contact with the credit bureaus (unless you fail to pay the loan as agreed).
And if you live in one of the 37 states where payday loans are legal, you won’t have any trouble finding a brick-and-mortar payday loan office. If you prefer not to leave the house, you can even take out an online payday loan.
Before you do, though, let’s talk.
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How payday loans work
Let’s say you want to borrow $300 from a nearby payday lender. They ask to see your identification 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 small print.
Their advertised interest rate doesn’t seem so bad. Although the contract they slide across the counter spells out the true cost of the loan, it’s easy to miss. Pay close attention to the APR, even if you’re in a hurry. APR is what you actually pay to borrow the money. It includes the advertised interest rate, but also includes a myriad of fees that add to what you owe.
According to the Consumer Financial Protection Bureau (CFPB), the fees tacked onto a payday loan can be a challenge to pay off. Typically, payday lenders charge a percentage on every $100 borrowed — $15 per $100 is common. So, if you borrow $300, add $45 to the amount you owe right away — before factoring in interest. There’s an origination fee, potential late fees, and maybe a fee if the lender loads your funds onto a prepaid debit card.
The average “real” rate to borrow from a payday lender is around 400%. The people who get hit hardest are those in states with no protections against payday loans. CNBC recently broke down which states allow payday lenders to charge the highest APRs:
- Texas 664%
- Idaho 652%
- Nevada 652%
- Utah 652%
- Missouri 527%
- North Dakota 526%
- Mississippi 521%
- Wisconsin 516%
- Louisiana 478%
- Kentucky 469%
- California 460%
- Tennessee 460%
- Alabama 456%
- Alaska 435%
Once you’ve signed 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 for 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 so you can avoid an overdraft fee.
It may come as no surprise to you that most borrowers are unable to pay off their loans in two weeks. After all, they still have rent, food, and other bills to pay. And now they have a loan with a sky-high interest rate and all kinds of fees.
So what happens if you can’t pay off your payday loan? The lender will gladly offer you another loan to pay the first.
Let’s say the balance on your $300 loan has ballooned to more than $400. You borrow $400 to pay off the first loan, and the lender charges you another $60 in fees ($15 per $100). They are likely to charge a “rollover fee” of around $45, too. So two weeks after you borrowed $300, you’re in debt for $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 difficult to get out from under. Due to how these predatory lenders operate, even small payday loans can be costly.
With around 23,000 payday lenders spread across the 37 states where they operate, you will have no trouble taking out a payday loan if that is truly what you want to do.
Before writing that postdated check, though, consider the alternatives:
Help with bills
There is no shame in being low on 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 off, the refrigerator is empty, or you don’t have the money to buy your kid’s back-to-school items, there’s help available. Before you sign on with a predatory lender, reach out to an organization that wants to help. USA.gov is an excellent place to start, with information about government assistance, including immediate help 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 issue you may have. They point 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 quite as comprehensive as Need Help Paying Bills.
We rarely recommend taking a cash advance loan from a credit card, but if you’re in a pinch, it’s better than a payday loan. Let’s say you live in Louisiana, and your payday loan lender charges 478% APR for a short-term loan. Suddenly, paying 35% (or whatever your credit card company charges for a cash advance) feels like a bargain. It’s not, but if you can plan to pay the cash advance off 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 take the money out. Go in with a plan for how you’re going to pay it off in full.
Here are a few other ideas for coming up with money when you need it:
Personal loan. Don’t count yourself out if you have bad credit. There are some fine personal loans for bad credit, and though some of our favorites charge up to 35.99% interest, that beats payday loan interest charges. 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 tough to borrow from people you care about, but as long as you’re sure you can repay the money promptly, it doesn’t hurt to ask.
Credit union. If you’re a member of a credit union, you’re considered a member-owner. Credit unions tend to be more flexible with their member-owners, particularly if you’ve been with them for a while.
If you decide to take out a payday loan, there’s a good chance you’ll have no trouble finding one. There are nearly twice as many payday lenders in the U.S. as there are McDonald’s locations. Before you do, though, carefully consider some of the ideas we’ve mentioned. When it comes to small loans, nearly any alternative is better than payday lending.
The Ascent’s Best Personal Loans for 2021
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent’s top picks.