Should You Ever Get a Payday Loan?


If you’re short on cash between paychecks or have an unexpected financial emergency, a payday loan can be a tempting option to help make ends meet or access money quickly. However, these short-term loans, which typically mature on the next payday, are extremely risky. They come with very high interest rates and other fees. The interest rate on payday loans in the United States ranges from 154 percent up to 664 percent or more.

Equally troubling, payday loans are often marketed to those who can least afford them — those who make less than $40,000 a year. While this type of lending is advertised as a short-term loan, payday loans can create a debt cycle that is difficult to break out of.

What is a Payday Loan?

A payday loan is typically a short-term loan with a term of two to four weeks that does not require collateral to obtain. These types of loans are usually expected to be repaid in a single payment on your next paycheck when you receive Social Security income or when you receive a pension payment.

In most cases, payday loans are granted for relatively small amounts, often $500 or less, with the average borrower getting a payday loan for around $375. In some cases, payday loans can be taken out for larger amounts.

To obtain a payday loan, borrowers are asked to write a personal check for the amount of the debt plus any financing costs and fees. If the loan is not repaid on time, the lender will deposit the check to get their money back. Some lenders may require authorization to electronically withdraw the money from your bank account instead of requiring you to present a personal check.

Payday loans generally do not involve any credit checks, and your ability to repay the debt while paying your day-to-day expenses is not usually considered as part of the application process.

Who Usually Takes Out a Payday Loan?

Payday loans are most often taken out by people who have constant liquidity problems as opposed to borrowers who are in financial distress. A payday loan study conducted by the Pew Charitable Trusts found that the vast majority of payday loan users, 69 percent, first resorted to this type of borrowing to cover recurring expenses such as utility bills, rent, mortgages, student loan payments, or credit card bills. Only 16 percent of borrowers use payday loans for unexpected expenses.

These types of loans are also commonly used by people living in neighborhoods and communities underserved by traditional banks, or by people who don’t have a bank account with a major financial institution. There are approximately 23,000 payday lenders across the country, many in physical stores or online.

What are the risks of payday loans?

Because of the many risks associated with payday loans, they are often viewed as predatory lending.

First off, payday loans often come with astronomical interest rates. Those who take out such loans have to pay between $10 and $30 for every $100 borrowed. A typical payday loan with a two-week repayment period and a fee of $15 per $100 equates to an APR of nearly 400 percent.

Many payday lenders also offer extensions or extensions that allow you to simply pay the borrowing fees on the loan’s due date and extend the balance due for a longer period of time. This can be a slippery slope, resulting in borrowers quickly becoming overwhelmed with fees and interest that accrues. According to the Consumer Financial Protection Bureau, borrowers default on up to one in five payday loans.

Because payday loans do not consider an applicant’s full financial picture, including their ability to keep up with other financial obligations and living expenses while paying off the payday loan, these types of loans often leave borrowers in a vicious circle of debt.

Are Payday Loans Ever Worth It?

With their high interest rates and fees, a payday loan is rarely a good idea. The fees alone cost Americans $4 billion a year. Because the costs associated with these loans are so high, borrowers often struggle to repay them and go deeper into debt. Therefore, it’s a good idea to carefully consider your options before taking out a payday loan.

However, if you have an urgent need or need cash fast and you are absolutely certain that you can repay the loan with your next paycheck, a payday loan can make sense. These loans may also be worth considering if you have no other financial options or if you have bad credit and would not qualify for a traditional loan.

Alternatives to payday loans

Before taking on the significant financial risks involved with a payday loan, examine other alternatives that may be less expensive. Some of the options to consider include:

  • Private loan: For those with good credit, a personal loan can be a safer and less expensive borrowing option. Additionally, if you need cash fast, there are online lenders who can provide you with personal loan funds in just a day or two.
  • Borrow money from family or friends: Payday loans should be the last resort. If you have family or friends willing to help, borrowing money from loved ones may be a better idea than from a predatory lender.
  • Home Loans: Tapping into your home equity offers a far more competitive interest rate than a payday loan. Home equity loans are a popular way to access cash to consolidate debt or pay for other major or unexpected expenses. To access your home’s equity, however, you must meet certain requirements, including good credit, a stable income, and a debt-to-income ratio of 43 percent or less.

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