What is a payday loan? You know those places where you hear about “earning a quick buck”? They’re payday lenders — and they’re not your friends. Payday loans depend on desperate people who have few other options to keep their doors open.
how they work
Let’s say your car breaks down on the side of the road or your electricity has been cut off due to non-payment. You have no money in the bank and your credit rating is low. A payday lender may seem like a good idea. After all, they don’t require any credit checks and promise to get you the money you need fast.
According to a personal loan study by The Ascent, you could end up paying 400% or more in interest due to the design of payday loans. (Interest rates in 2019 ranged from 154% to 677%.) The average interest rate on a credit card is 16.16% according to CreditCards.com’s Weekly Credit Card Rate Report. And, at the time of this writing, the annual percentage rate (or APR) on the best bad credit personal loans tops out at around 35.99%. Given these statistics, charging over 400% is the act of a predatory lender.
Part of the problem is this: In 2019, 33 states still allowed payday loans. (Some other states have ended these predatory lending practices.) None of the 33 states that still allow payday lenders to operate limit the amount of interest charged.
How they keep you hooked
Whether you visit a payday lender’s physical location or take out a payday loan online, lenders make it easy for you. All they need is proof of identity, proof of your gross monthly income, and a post-dated check. You tell them how much you want to borrow, and they ask you to write a check for the amount you borrowed, plus fees. They make you postdate the check two weeks.
If you can’t repay the loan in full by the due date (and the average borrower can’t), you owe them the original amount you borrowed, any fees they added to the loan, and interest accrued in those two weeks. Let’s say you initially took out a small loan of $500. Two weeks later, you could owe $600 or more.
Hey, that’s fine – at least according to the payday lender. They will give you another one loan to repay the first loan. Now you will need to borrow the $600 (or more) you owe on the original loan and another round of loan fees. Between principal, fees, and finance charges, you’ll likely end up owing $700 or more two weeks down the road.
Payday lenders are not naive. They know you have other financial obligations. It is in their interest to continue borrowing to repay previous loans. When you finally pay off all the debt, they end up with more money due to excessive fees and interest. Even small dollar loans can end up being very expensive.
We can’t tell you about payday loans without suggesting other ways to find money when you’re in need.
Consider a cash advance
If you have a credit card, a cash advance loan may be the solution. Cash advances usually carry a higher interest rate than regular credit card purchases, so we don’t normally suggest you take out one. However, when the choice is between a cash advance with an APR of 30% or a payday loan with an APR of 400% or more, a cash advance is a clear winner. Most cash advances have fees and start earning interest immediately, so be sure to pay them back as soon as possible.
Turn to friends and family
If you only need enough to last you until your next payday, help from a friend or family member might be the answer. Before borrowing, however, make sure you can repay the loan as promised. There are few things worse than leaving someone else in the lurch because you couldn’t keep up your end of the bargain.
Let’s say you paid to fix your car but you don’t have the money to feed your family. Several organizations offer services to help you. There is help available for just about everything, from errands to utility bills to transportation. Need Help Paying Bills has a long list of organizations, who they help and how to contact them.
Apply for a bad credit loan
As mentioned, borrowers with bad credit scores may still qualify for a bad credit personal loan. Your interest rate is likely to be high, but it’s better than paying 400% interest.
Taking out an installment loan like this offers several advantages:
- You will know exactly how much your monthly payment will be and when the loan will be fully repaid.
- You can “set it and forget it” by scheduling automatic monthly payments from your bank account.
- If you want to repay the loan quickly, you can choose a short term loan.
- Personal loans are available from local banks, credit unions and online lenders.
- You can avoid a predatory high interest rate.
- As long as you stick to the repayment plan, your credit score is likely to rise.
In short, trying one of these options instead of falling victim to predatory payday loans is good for your bottom line.
The best credit card cancels interest
If you have credit card debt, transferring it to this superior balance transfer card can pay you 0% interest for 18 months! It’s one of the reasons why our experts rate this card as a top choice to help you control your debt. This will allow you to pay 0% interest on balance transfers and new purchases during the promotional period, and you will not pay any annual fees. Read our full review for free and apply in just two minutes. We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. Ally is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Dana George has no position in the stocks mentioned. The Motley Fool holds shares and recommends Ethereum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.