Key takeaways
Payday loans are small loans with high fees that typically have to be paid off in 14 days.
People typically choose payday loans because they’re easy to qualify for and funds are available quickly, but the terms make them incredibly risky.
Many states restrict or ban payday loans because they can lead to severe financial problems if they aren’t paid off on time.
If getting money quickly is a priority, you might not have the time to think whether the easiest option is a good idea — and that’s exactly what predatory lenders are counting on. Payday loans are unsecured personal loans that allow you to borrow a small amount with a short repayment term. All you need to qualify is proof of income.
They can be tempting if you urgently need money before your next pay period. The bad news: You’re very likely to get trapped in a toxic cycle of debt with an annual percentage rate (APR) of 400% or more. Since many borrowers often roll over their loan balances with additional fees, they often end up in worse financial shape.
It’s critical to understand how these loans work and find alternatives so you don’t end up in an endless cycle of payday loan rollovers.
What are payday loans and how do they work?
Payday loans are small loans, usually $500 or less, that are repaid within 10 to 14 days. Rather than a traditional interest rate, lenders have a set finance charge that often leads to a triple-digit APR.
That makes them difficult for most people to repay on time, and as a result, payday loans are notorious for high rollover rates. Refinancing, or rolling over, the loan triggers additional fees, which can make a bad financial situation worse. The debt balloons over time, far exceeding the initial balance.
Check if payday lending is legal in your state
Payday loans are regulated at both the federal and state level, and many states have laws that limit the loan amount, fees or rollover costs interest rates payday lenders can charge. Others have banned payday loans entirely because of the high costs and predatory nature of these products.
Check the National Conference of State Legislatures (NCLS) website for laws in your area.
How much does a payday loan cost?
Rather than interest, payday lenders generally charge a flat fee that ranges between $10 and $30 for every $100 borrowed, based on findings from the Consumer Financial Protection Bureau. These fees can add up quickly. Across the 30 states that allow payday loans, consumers pay more than $2.4 billion in fees annually, according to the Center for Responsible Lending.
It’s essential to understand that an APR calculation assumes you have a debt for at least a year. — and it includes both interest and fees. Since payday loan must be paid in full within a matter of days or weeks, the high fees lead to a high APR. The cost of a loan may not seem like much, but the actual amount you pay is significantly more than the cost of a credit card or small personal loan.
How much does a $500 payday loan cost?
It’s critical to remember the higher the APR, the more money you’ll have to pay back. For example, if you borrow $500 with a 30% finance charge — $30 for every $100 borrowed — you’ll have to repay $650 in two weeks. That amounts to a 459 percent APR and is why payday loans are some of the most expensive loans you can get.
If you opt to roll the loan over, you’ll likely be charged additional fees and may owe the finance charge of $150 upfront. When rolling over a loan, a payday lender may only allow you to pay the fees due for the original loan term and none of the principal. You’ll still owe the original $500, plus a new $150 finance charge that must be paid when the loan extension elapses and the new due date arrives. In other words, you will end up paying $300 in fees on a loan of $500.
As a comparison, a credit card with an APR of 20% would only cost about $8 in interest if you paid off that same $500 balance within the month. And while a credit card for bad credit can be difficult to qualify for, it’s still much less expensive than a payday loan. Just avoid spending more than you can reasonably pay off in a single month so you don’t carry a balance.
Why payday loans are considered predatory
Payday loans are advertised as convenient. No credit check. Get your cash easily and quickly. That’s exactly what you want to hear in a tight financial spot, but in truth, payday loans are inherently predatory.
Some states require payday lenders to offer installment loan options so you can repay your balance over multiple months instead of all at once. However, in most states, consumer protections are minimal. In fact, Pew research finds that you could pay four times more if you live in a state that doesn’t heavily regulate payday lending.
If you can’t pay your payday loan off in full on the due date, you may have the option of rolling over your loan for an additional fee. As these charges stack, the debt will become increasingly difficult to pay off. Failing to pay can also trigger an automated withdrawal from your checking account, leaving you with less money — and potentially overdraft fees if you don’t have sufficient funds.
If you default, the lender can send you to collections, and a negative mark will appear on your credit reports for seven years. But what’s worse, the lender or debt collector can sue you. If you lose the lawsuit, they can obtain a garnishment order against you.
Note, however, that you can’t get arrested for defaulting on a payday loan itself. The lender also can’t legally threaten you with an arrest. But if you’re sued or there’s a court judgment against you, and you don’t appear in court, a judge may issue a warrant for your arrest. That’s why you should never ignore a court order.
The author’s expert insight
“The danger of payday loans is less about the APR and much more about the extremely short repayment period. If you need money immediately, you probably aren’t concerned with the annualized cost. In your mind, the loan will be repaid with your next paycheck, so APR is not even on your radar. The problem is if your last paycheck wasn’t enough to cover your expenses in between pay periods, where will the money come from to pay the extra payday loan fee you’ll owe? Also, unlike a credit card or personal loan, there’s no monthly payment option with a payday loan. You must pay the entire loan balance and the payday loan fee in full by your next paycheck. If you don’t, the rollover cycle begins, creating a devastating financial debt cycle for people already living paycheck to paycheck.”
– Denny Ceizyk | Bankrate Senior Loans Writer
Get free help before you borrow
If you’re in a tough financial situation, you might be able to avoid a loan. Check if you can get help from assistance programs — there are plenty available on federal, state and local levels. Some might cover your groceries or utilities, and others can even provide some cash.
Call 211: This free hotline is available nationwide and refers you to various types of assistance based on your situation.
Supplemental Nutrition Assistance Program (SNAP): This program offers monthly grocery assistance. Find your local agency to learn how you can apply.
Temporary Assistance for Needy Families (TANF): This program can help you obtain short-term cash assistance if you have children or are pregnant. You can apply on your state agency website or in person.
Low Income Home Energy Assistance Program (LIHEAP): If you’re eligible, this program can cover your heating and cooling bills. You can find your local office online.
Credit counseling: A non-profit credit counselor can work with you to get to the root of your financial difficulties and create a plan to overcome them, including negotiating your debt. You can connect with a counselor online or by calling the National Foundation for Credit Counseling at 833-674-1921.
If you still need a loan, consider alternatives first
When all else fails, there are still plenty of other ways you could get financing without turning to a predatory payday loan. These options are also comparatively easy to access, even if they might be harder to qualify for. Plus, interest and fee charges are much lower.
Use a credit card. If you have a credit card that’s not maxed out, use it for your expenses or see if it allows for cash advances. Your interest rate is likely to be lower than a payday loan, and you might have 30 days to pay the credit card balance before interest is added. Credit cards also allow you to make a minimum payment, which could give you more time if an unexpected cost pops up.
Check out a payday alternative loan at your local credit union. Credit unions offer payday alternative loans (PALs) that allow you to borrow between $200 and $2,000 for one to six months. The APR is capped at 28%.
Apply for a personal loan online. A personal loan may allow you to get funds quickly, even with a relatively low credit score. For example, Avant requires a minimum FICO credit score of 550 with an estimated APR ranging from 9.95 percent to 35.99 percent — significantly lower than the estimated 400 percent you’d face on a payday loan. Other lenders, like Upstart and SoFi, have no minimum credit score requirements.
Ask family and friends for help. Friends and family might not always be able to lend money, but sometimes they can help in ways that can lessen your expenses. For example, they can let you do your laundry at their place, saving your costs at the laundromat, or they can make dinner with you and give you leftovers that will last until payday.
Ask your employer for an advance. Check with your employer if you can get an advance on your paycheck to tide you over. Your HR or payroll department may be able to help you out. Alternatively, look into cash advance apps like Earnin or Brigit. Note that while these typically don’t charge interest, you might have to sign up for a monthly subscription.
Seek leniency or delay payments. If you owe money on certain bills, you should call each creditor to request an extension on your balance due date until you have the money to pay it back. Some companies will agree to this leniency or find ways to allow you to make partial payments on your bills.
Learn more: Bankrate’s guide to payday loan alternatives
Are payday loans ever worth it?
Yes, if you have no other way to meet a critical need like paying rent, buying food or paying an electric bill before your power is turned off. Payday loans are the last-resort option to consider in crisis situations when you can’t qualify for a credit card or a bad credit personal loan and don’t have family or friends you can borrow from.
The key to avoiding relying on them is to have a plan to repay them in full. That might mean volunteering for extra hours at work, putting in some overtime or taking a temporary or gig job to make extra money.
And don’t forget: federal, state and local assistance programs might be able to help you get back on your feet without borrowing money altogether. Or, you might be able to qualify for more traditional credit products even with bad credit, so make sure to explore all your options first.
Frequently asked questions
What’s the difference between a payday loan and a personal loan?
A payday loan is usually a two-week temporary unsecured loan for no more than $500 that’s approved based on your income without a credit check. Personal loans are unsecured installment loans of $1,000 to $100,000 funded in a lump sum and repaid in equal installments over one to seven years. A personal loan requires that you meet credit score standards set by the lender and qualify based on your income and other debt payments.
A payday loan and a personal loan have some similarities. Both are unsecured loans, which means that, unlike a mortgage or auto loan, they are not backed by collateral. However, you’ll want to be aware of a few important differences.
What are payday loan borrowing terms?
Usually the word “term” in lending as two meanings:
With a payday loan, your term is typically 10 to 14 days or whenever you receive your next paycheck. There is no interest rate, monthly payment or payment schedule because you must pay the entire balance in full. The fee is added to your loan balance and is due by your next pay period.
How do you make a payday loan payment?
You can repay a payday loan in a few ways. You might give the lender a postdated check that it can deposit on your next payday. Alternatively, you can authorize the lender to take the funds from your bank account once your employer pays you or receive benefits such as Social Security income or a pension.
If your check bounces or you can’t pay the full balance on the required payday, that’s when a lender might offer you a “rollover.” A rollover allows you just to pay the initial borrowing fee until your next paycheck, but you’ll still be on the hook for the original loan balance plus the fee for the rollover amount.
The fees pile up rapidly with each rollover, making it difficult for borrowers to get out of the payday loan debt cycle.
