In a Jam? Don't Take Out a Payday Loan Without Reading This First
- Payday loans may appear to solve your short-term financial problems, but they often create worse long-term problems.
- There are other, more affordable ways to get the money you need in a pinch.
These fast and easy loans come at a terrible price.
When you have bills piling up, it's natural to look for the quickest way out of your predicament. But sometimes, what seems like the perfect solution can actually lead to bigger problems. Such is the case with payday loans, which promise quick and easy cash while hiding an alarming cost. But don't worry. There are other ways to get the money you need, and if you already have payday loan debt, it is possible to get out of this situation.
What's so bad about payday loans?
A payday loan is a short-term loan, usually of $500 or less. It's much faster to get one of these types of loans than other, more traditional loans from a bank. Usually, all you have to do is provide some identification and proof of income, then write a post-dated check or allow the lender to withdraw the funds from your account on your next payday. There's no collateral required, and you can walk out the door with your cash within minutes.
It sounds great in theory, but payday loans usually carry astronomical interest rates. A typical credit card might have an annual percentage rate (APR) of 15% to 30%, depending on the cardholder's credit. A payday loan can easily have an APR of 400% or more.
Those who aren't able to pay back what they owe often end up extending their payday loan, which just adds more interest, and the cycle continues month after month. Over time, it gets increasingly difficult to keep up with the payments as the interest charges balloon.
Let's say you take out a $100 payday loan with a 400% APR due in two weeks. If you're not able to pay it back, the payday lender will now charge you interest on your initial $100 plus the $15.34 in interest you owed from the first loan. If you can't pay back the loan after a month, you'll owe $165. After three months, it'll cost you $232. And after a year, you'll owe $500, assuming you continue to extend the loan without paying anything back.
Payday loans are so dangerous that some states have banned them outright while others have limited the interest rates and fees payday lenders are allowed to charge their customers. But plenty of states still allow these outrageous charges to continue. Fortunately, payday loans aren't the only way to get the money you need.
Payday loan alternatives worth considering
Avoiding payday loans is possible, but your approach will depend on several factors, including your credit and how soon you need the cash. For non-emergency costs, often the best strategy is to save up for your purchases a little at a time. And if you don't have an emergency fund yet, you should build one so you don't need to borrow money when an unexpected expense arises.
In some instances, you may be able to work out a payment plan rather than paying for a large bill all at once. Many hospitals enable you to do this for medical debt and you may be able to do the same for other bills as well.
Personal loans are another option, and they're also a great choice for those who already have payday loan debt. This is another type of loan that doesn't have collateral, and it's possible to get one even if your credit isn't great. Interest rates on these loans are higher than what you'll see with a mortgage or auto loan, but they're much more affordable than payday loans. You can also borrow a lot more if you need to and many lenders give you longer repayment terms. Plus, a lot of lenders can get you the cash you need in a day or two.
There are other kinds of hardship loans available as well, for things like medical care or emergency home repairs that may help you in certain situations.
Finally, you can check out local charities if you need help with the essentials. You may be able to get food, clothing, and other must-haves at little to no cost.
It's usually possible to find better options than a payday loan. But if you choose to take one out anyway, make sure you understand its costs and feel confident that you can repay it on time. Otherwise, you're just kicking your financial problems down the road.
Alert: highest cash back card we've seen now has 0% intro APR until nearly 2025
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.