What’s a Payday Loan… and Why Isn’t It the Best Move?

Here’s a loose definition of a payday loan: It’s a way to use your upcoming paycheck to borrow money when you NEED cash – and you need it fast.

It’s a relatively small loan (no bigger than your paycheck), but it comes with a HUGE interest rate and a small window of time to repay it.

If you can’t pay the loan back by the time payday rolls around, the lender will pile more interest and fees on top of what you already owe. Not cool. 

How Payday Loans Work: Know The Risks

Understanding what makes them uniquely risky can help you decide if you should get one. 

Because of their extremely lender-friendly terms, payday loans put more financial pressure on you than other types of short-term loans. If you can’t repay in time, you risk being trapped in a debt cycle that can become harder and harder to escape. 

If you can get a personal loan from a bank or credit union, that’s always a better option.

Personal loans usually charge less interest and offer more breathing room to pay back the loan.

Before you head over to a payday lender, we want to make sure you get a good feel for how they work. Make sure you understand their pros AND cons.

What are the pros and cons of payday loans?

Pros	Cons
👍 They have few requirements.  👍 The approval process is really fast. You can get one in minutes. 👍 There are a wide variety of payday loans available.  👍 They can help you pay for something unexpected – and urgent.	👎 They’re expensive (because of HIGH interest). 👎 They can sink you deeper into debt if you can’t pay them back in time. 👎 Payday loan lenders can be relentless with debt-collection attempts. 👎 Your bank account could be hit with overdraft fees.

How do you get a payday loan?

Here’s how a payday loan typically goes down:

• A borrower applies for a payday loan through a lender.
• If the lender greenlights the loan, they’ll either ask the borrower to write a postdated check for the loan (including interest and fees) that can be cashed the next time the borrower gets paid or they’ll have the borrower supply them with their checking account number.
• When the due date comes, the borrower has to pay the entire amount back – the loan, the interest and the fees. 

Buuut, for many payday loan borrowers, the process doesn’t end here.

• If a borrower doesn’t have the money in their account to cover the payment – well, suddenly – the debt slope starts to get mighty slippery.
• In some states, the borrower can ask for an extension or a rollover to repay the loan (more on this later). These options mean additional fees, and not all lenders offer them. 

What Are Some Good Payday Loan Alternatives?

Maybe you’ve been considering a payday loan because you’re in a tight spot, but if its cost (or your ability to pay it back) doesn’t fill you with Dwayne-The-Rock-Johnson-level confidence, you’ve got options.

• Personal loans: This could be a good option for you. Personal loans are less expensive than payday loans, and depending on the loan’s requirements, your credit score and/or previous financial standing may qualify you for one. You may also qualify for a small-dollar loan, which is a small unsecured amount of money (typically around $500) from your bank or credit union. Ask your lender for more info.
• Cash advance app: App-only lenders deposit interest-free cash advances into your bank account – but charge upfront fees (often less than payday loan fees).
• Employer-sponsored cash advance: This works like a cash advance app, minus the fees. Does your employer offer this benefit?
• Assistance programs from local nonprofits: Local and regional community organizations often provide financial assistance to people facing money emergencies. Their small loans usually have generous terms, but eligibility depends on income requirements. 
• Credit cards (for emergencies and cash advances): Credit card companies offer members short-term loans with much lower interest rates than payday loans. Helpful, but don’t take these lightly. Have a plan for paying them back quickly or you might get sucked into a debt cycle with these, too. You can also keep a credit card aside for emergencies only. Interest will accrue, but not as much as it would with a payday loan.
• Emergency savings: If your budget allows you to save for surprise expenses, an emergency fund is the BEST alternative to payday loans. 

Payday Loan Groans

Don’t get caught off guard. Payday loans can be painful. There’s a reason why they’re often referred to as “predatory loans.”

Knowledge is power. Here’s some extra stuff you might want to know about payday loans. 

Payday Loans: Quick-Fire FAQs

How much can you borrow with a payday loan?

The max amount you can borrow will depend on two things: how much you get paid and the payday loan rules in your state.

To find your state’s cap on payday loans, check out this state-by-state list of payday lending rules published by the National Conference of State Legislatures (NCSL).

How do you receive payday loan money?

You can get your payday loan money as cash, as a check, as a direct deposit or on a prepaid debit card. It may sound like easy money, but remember the risks and costs that come with it. 

How long do you have to repay payday loans? 

You usually have 2 to 4 weeks to repay a payday loan, depending on your pay schedule.

Payday loans are usually repaid the same day the borrower gets their next paycheck. No installments. Just a single payment.

How much do payday loans cost?

Payday loans are expensive, expensive. 

Also, they’re EXPENSIVE. 

Prepare for a showdown with a few stealthy charges if you get one of these loans.

The biggest villain in the payday loan universe is interest. Its henchmen are the fees you pay when you can’t repay your loan on time.

According to the Consumer Financial Protection Bureau, it’s not uncommon to pay $15 interest on every $100 you borrow.^[1] Apply that to a $300 loan, for example, and you’ll end up owing the lender $345. Assuming it’s a two-week loan, it’s the same as having a credit card with a 400% annual percentage rate (APR). 

Compare that to the average APR for credit cards, which is about 16%, according to the Federal Reserve’s most recent data.^[2] 

How Do Payday Loans Affect Your Credit Score?

If you’re working toward a better credit score (or trying to maintain a good one), think long and hard if you’re considering a payday loan.

Paying these kinds of loans back on time – while admirable – doesn’t improve your credit score or build credit history. And if you don’t pay the loan back on time, it can hurt your credit.

What Happens If a Payday Loan Isn’t Paid Back?

Your original debt can grow out of control if you don’t pay off the loan on payday.  Before you know it, it can feel very much like that ginormous boulder rolling behind Indiana Jones.

If you “no-show” when it’s time to pay, the lender can cash the postdated check or withdraw the money from your bank account. 

A late payment risks tanking your credit score and getting hit with an assortment of unpleasant fees, including insufficient funds fees, late fees, and “rollover” fees. 

Payday lenders aren’t as likely as credit unions or banks to work with you when you can’t pay on time.  

Trust YOUR Gut

When you’re in a tight money spot, only you can decide if a payday loan is worth it. 

If you’ve weighed all your options and you still want a payday loan, take a look at your budget and make sure you’ll be able to repay it once the due date rolls around.

The harder it is for you to pay back your loan, the harder it is to stop the fees from piling on. It can make a bad situation even worse, especially if you’re trying to cut down on debt.

If you’re considering payday loans because of financial difficulties, consider debt, credit or budget counseling. 

Many nonprofit organizations can help you find your financial footing again.

Whatever you decide to do, we’re happy that you’re taking the time to understand your options!