What Is a Payday Loan?

A payday loan is a short-term, high-cost loan designed to help you cover immediate cash needs until your next paycheck. These loans are typically available online or at physical branches of payday lenders. They often come with exorbitant fees and interest rates, making them a costly option for borrowers.

How Do Payday Loans Work?

When you take out a payday loan, you may receive cash, a check, or a direct deposit into your bank account. In return, you write a check for the loan amount plus a finance charge, or you authorize the lender to withdraw the amount from your bank account on the repayment date, usually within 14 days. If you can’t repay the loan on time, you may roll it over into a new loan, compounding your debt and making it harder to manage.

How Much Do Payday Loans Cost?

Payday loan costs vary by state, with fees ranging from $10 to $30 for every $100 borrowed. A typical two-week payday loan costs $15 per $100 borrowed, translating to an annual percentage rate (APR) of around 400% or more. In comparison, credit card APRs usually max out at 30%, and personal loans typically have APRs up to 36%.

Why Are Payday Loans Bad?

While payday loans can provide quick cash in emergencies, they often do more harm than good. Here are some reasons to avoid them:

• High Costs: With an average APR of 400% or more, payday loans are extremely expensive.
• Short Repayment Terms: Repayment is usually due within two weeks, giving you little time to resolve your financial issues.
• No Credit Benefits: Payday lenders don’t report on-time payments to credit bureaus, so these loans don’t help improve your credit score.

Alternatives to Payday Loans

Before resorting to a payday loan, consider these alternatives:

Bad-Credit Personal Loans

Some lenders specialize in offering personal loans to people with poor credit. These loans usually have lower interest rates than payday loans and more manageable repayment terms.

Family or Friends

While it may be uncomfortable, asking a loved one for financial help can be a better option than falling deeper into debt. Make sure to create an official agreement to avoid straining your relationship.

Bad-Credit Credit Cards

Some credit cards are designed for people with bad credit and don’t require a security deposit. Retail credit cards, for example, often have low credit requirements and can be used outside the store.

How to Get a Payday Loan

If you decide to get a payday loan, first check if they are legal in your state. You can apply online or at physical stores that offer payday loans. However, consider this option only as a last resort and explore all alternatives first.

Know Your Options

Payday loans can provide short-term cash, but they are not the only option. If you need money urgently, explore other ways to get emergency cash. Improving your credit score can also open up better borrowing options in the future.