If you need money to pay your bills, you might think about getting a payday loan. But before you sign on the dotted line, you should know there are serious downsides to payday loans and there are other loan options you should consider.
Payday loans might look like a quick, easy way to get cash when money’s tight. With these types of loans, here’s not a lot of paperwork, no credit check, and you don’t have to give the lending companies something of value, like the title to your car, to qualify. But there are other risks to understand.
How do payday loans work?
A payday loan is a very short-term loan that provides you with a small amount of cash. You can apply in person or online for a payday loan and you write a check or set up an electronic debit from your checking account for the amount you want to borrow plus any fees. The lending company gives you the cash and holds the check or debit until you’re supposed to pay the loan back, usually in a week or two or when you get your next paycheck. At the end of the loan period, the lending companies cashes the check or withdraws the amount from your bank account.
If you can’t pay the loan back, you can roll it over, basically taking out a new loan. When you roll payday loan over, the lending company adds additional fees to the amount you owe, so the amount you need to pay back grows.
What are the downsides of payday loans?
- Very high interest rates: At first glance, the cost of a payday loan may not seem so high. For example, if you take out a $500 loan for two weeks, you may pay back $575. But if you calculate the annual percentage rate (APR), it’s 391%. Some payday lenders charge an even higher rate—more than 700% APR in some cases.
- It can be hard to pay off the loan on time: If you’re having trouble making ends meet, it can be hard to come up with the money you need to pay back your loan. If you can’t pay it back, you may roll the loan over. Then you have to pay more fees and your debt gets bigger and tougher to pay back. In fact, on average, payday loan borrowers take more than half a year to pay back their loans.
- Debt can grow quickly: Because of the very high interest rates and difficulty of paying the loans off on time, the amount of money you owe can grow very quickly.
Three alternatives to payday loans.
Before taking out a payday loan, look into these other options:
- Ask your creditors to set up a payment plan. They may be willing to temporarily accept partial payments on your loan or extend your due date.
- Consider a personal installment loan. Many lending companies, such as Regional Finance, offer short-term loans at much lower interest rates than payday lenders. If you have several debts you’re working to pay off, you may be able to consolidate those debts with a type of personal loan called a debt consolidation loan. Then, you have a year or more, rather than a few weeks, to pay off your loan.
- Explore a credit card cash advance. Although cash advance interest rates are high, they’re still lower than the rates for payday loans.
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