What are Payday Loans?

What are Payday Loans? Do you know those places where you hear about making money fast? These are payday lenders – and they are not your friend. Payday loans depend on desperate people who have few other options to keep their doors open.

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How they work

Let’s say your car breaks down on the side of the road or your electricity has been cut for non-payment. You have no money in the bank and your credit score is low. A payday lender might seem like a good idea. After all, they don’t require a credit check and promise to get you the money you need quickly.

According to a personal loan study by The Ascent, you could end up paying 400% or more interest because of the way payday loans are designed. (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 rates report. And at the time of this writing, the annual percentage (or APR) of the best personal loans for bad credit is around 35.99%. Given these statistics, collecting more than 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 put an end to these predatory lending practices.) None of the 33 states that payday lenders still operate have limits on the amount of interest charged.

How they get you addicted

Whether you are visiting the physical location of a payday lender or getting an online payday loan, lenders make it easy. All you 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 instruct you to write a check for the amount borrowed plus fees. You have to advance the check by two weeks.

If you can’t fully repay the loan by the due date (and the average payday borrower can’t) then you owe them the original amount you borrowed, any fees they attached to the loan, and those in those two accrued interest weeks. Let’s say you originally 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 loan provider. They give you Another Loan to pay off the first loan. Now you need to borrow the $ 600 (or more) you owed on the original loan plus one more round of loan fees. Between the principal, fees, and financing costs, you will likely owe $ 700 or more two weeks later.

Payday lenders are not naive. You know you have other financial obligations. It is in your best interests if you continue to borrow to pay off previous loans. When you finally pay off the debt in full, you will have more money from excessive fees and interest. Even small dollar loans can get very expensive.

A way out

We cannot tell you about payday loans without suggesting other ways to find money when you are in need.

Consider a cash advance

If you have a credit card, a cash advance can be the answer. Cash advances usually have a higher interest rate than regular credit card purchases, so we would normally not recommend that you take out a loan. However, if you choose between a cash advance with an APR of 30% or a payday loan with an APR of 400% or more, a cash advance is the clear winner. Most cash advances come with fees and start paying interest instantly, so pay them back asap.

Reach out to friends and family

If you only need enough to get through until your next payday, the help of a friend or family member can be the ticket. However, before borrowing, make sure that you can repay the loan as promised. There are few things worse than abandoning someone else because you couldn’t keep your end of the deal.

Check out nonprofits

Let’s say you paid to have your car repaired, but now you have no money to support your family. A number of organizations offer services to help. Help is available for almost everything – from groceries to utility bills to transportation. Need help paying bills offers a long list of organizations they can help and how to contact.

Apply for a loan with bad credit

As mentioned earlier, bad credit borrowers may still qualify for a bad credit personal loan. Your interest rate is likely high, but better than paying 400% interest.

Taking out such an installment loan offers several advantages:

  • You know exactly what your monthly payment will be and when the loan will be repaid in full.
  • You can “set and forget” it by scheduling automatic monthly payments from your bank account.
  • If you want to pay off the loan quickly, you can choose a short loan term.
  • 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 schedule, your credit score will likely go up.

In a nutshell, trying any of these options instead of falling prey to predatory payday loans is good for your bottom line.

About Justin Howze

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