If you are looking for a small loan, you might be tempted to use a payday lender. After all, it seems so easy: get in, provide some basic information, and walk away with the cash you need. Payday loan companies never check your credit score or make contact with the credit bureaus (unless you don’t pay off the loan as agreed).
And if you live in one of the 37 states where payday loans are legal, you will 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, however, 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 ID and proof of income (like a pay stub). There is no credit check. They give you a contract with about a million words written in fine print.
Their advertised interest rate doesn’t look that bad. Although the contract they slip over the counter specifies the true cost of the loan, it is easy to miss it. Pay close attention to the APR, even if you are in a rush. The 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), 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 add $ 45 to the amount you owe right away – before taking into account interest. There are set-up fees, potential late fees, and maybe 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%. The hardest hit are those who live in states with no payday loan protection. 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 have 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 post-date the two-week check. After those two weeks, 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 should tell them before they deposit the check to 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 an exorbitant interest rate and all kinds of fees.
So what if you can’t pay off your payday loan? The lender will be happy to offer you another loan to pay off the first one.
Let’s say your $ 300 loan balance has swelled to over $ 400. You borrow $ 400 to pay off the first loan, and the lender charges you an additional $ 60 ($ 15 per $ 100). They are also likely to charge a “rolling charge” of around $ 45. So two weeks after you borrow $ 300, you are $ 505 in debt (before interest) – all because you had to take out a second payday loan.
Payday loans are extremely easy to obtain, but it is difficult to get by with payday loan debt. Because of how these predatory lenders work, even small payday loans can be costly.
With around 23,000 payday lenders spread across the 37 states in which they operate, you will have no trouble taking out a payday loan if that’s really what you want to do.
Before writing that post-dated check, however, consider the alternatives:
Help with invoices
There is no shame in being short of funds. Millions of Americans are in the same boat, doing all they can to get by. If you’re considering a payday loan because a utility has been cut, the refrigerator 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 is interested in helping you. USA.gov is a great place to start, with information on government assistance, including immediate food assistance.
Another great resource is Need Help Paying Bills. With an easy-to-navigate menu on their home page, Need Help Paying Bills asks you for help with any financial issues you may have. They advise you to help pay utility bills, food banks in your area, free job training, and even free dental clinics. There are few resources as comprehensive as Need Help Paying Bills.
We rarely recommend taking a credit card cash advance loan, but if you’re in a rush it’s better than a payday loan. Let’s say you live in Louisiana and your payday lender charges an APR of 478% on a short-term loan. Suddenly paying 35% (or whatever your credit card company charges for a cash advance) seems like a good deal. You don’t, but if you can plan to pay off the cash advance quickly, you’re in better shape than with a payday loan.
One important thing to remember about cash advances: Interest starts accruing as soon as you withdraw the money. Enter with a plan to find out how you’re going to pay it back in full.
Here are some other ideas for finding cash when you need it:
Personal loan. Don’t discount yourself if you have bad credit. There are some really good personal loans for bad credit, and while some of our favorites charge up to 35.99% interest, that outweighs the interest charges on payday loans. With a personal loan, the interest rate is fixed, and it’s an installment loan, so you know exactly how much your payment will be each month.
Family and friends. It can be difficult to borrow from people you love, but as long as you are sure you can pay the money back quickly, it doesn’t hurt to ask.
Checkout. 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’ll have no trouble finding one. There are almost twice as many payday lenders in the United States as there are McDonald’s branches. Before you do so, however, take a close look at some of the ideas we’ve mentioned. When it comes to small loans, almost all alternatives are better than payday loans.