With APRs that can top 700%, taking out a payday loan is one of the most expensive ways to borrow money. But when you don’t have any cheaper options, this type of short-term loan can help you stay afloat.
Compare providers and know the laws in your state to make sure you’re working with a legit lender. And stay on top of repayments to avoid getting caught in a cycle of debt.
A payday loan is designed to help you in an emergency. They might be useful in the following situations:
You have bad credit and need money fast. If you have bad credit, most options that are available to you on short notice are expensive. In this situation, a payday loan might be the least-expensive option out there.
You need less than $500 and need money fast. Loans under $500 on short notice can also be difficult to come by, regardless of your credit score. Payday loans are one of your few options.
You need money today. Payday loans are one of the few financing options available the same day — especially if you don’t have perfect credit, a car to use for collateral or need money on the weekend.
You don’t have a bank account. You need a checking or savings account to qualify for most types of loans. However, some payday lenders don’t require you to have a bank account and instead offer the funds in cash or on a debit card.
You don’t have a salary. A payday loan might be one of the few options out there if you rely on alternative sources of income, such as government benefits, a pension or alimony.
Payday loans vs. overdrafting your account
Overdrafting your account can be the closest alternative to taking out a payday loan — it’s fast, you don’t need good credit and you can get the money instantly. But it could actually cost more.
Most payday loans come with a $10 to $15 fee per $100 borrowed, depending on where you live and the lender. The average overdraft fee is $30, according to the Federal Deposit Insurance Corporation (FDIC). In this case, an overdraft fee might only be cheaper if you borrow more than $200 or $300.
When should I avoid payday loans?
Generally, you might want to stay away from payday loans in the following situations:
You live in a state where payday loans are illegal. Payday loans aren’t legal in all states. Check your state’s laws to avoid borrowing from an illegitimate lender.
You have time to qualify for a less-expensive alternative. The main advantage of payday loans is that they’re fast and available to borrowers with less-than-perfect credit. But there are payday loan alternatives that are significantly cheaper and come with fewer risks.
You have ongoing financial problems. A payday loan is a short-term solution to temporary problems. If you have ongoing financial difficulty, consider talking to a credit counselor who can walk you through your other options instead.
You already have a payday loan. Rolling over your payday loan can get you trapped in a cycle of debt and cost you three or four times the amount you borrowed in fees. If you’re struggling to repay a payday loan, also consider credit counseling.
You need more than $500. Most states cap payday loans at around $500. If you need to borrow more, this isn’t the right type of loan for you.
You don’t think you can pay it back. Many states require payday lenders to make sure you have enough income to repay your loan. But even if yours doesn’t, borrowing money you’re unable to repay will land you in an even worse financial situation.
Are there any cheaper alternatives?
Yes, though which option is best for you depends on your particular needs. They include:
Payday alternative loans (PALs). Some federal credit unions offer PALs between $200 and $1,000 to all credit types. APRs are capped at 28% and terms range from one to six months. But you need to be a member of the credit union for at least a month to qualify.
Pay advance apps. You may be able to get an advance on the salary you’ve already earned at little or no charge through pay advance apps like Earnin — sometimes as soon as the same day.
Employer paycheck advance. Some companies offer paycheck advances or short-term loans to employees — regardless of your credit history — often at a lower cost than a payday loan.
Government resources. If you’re experiencing a long-term financial setback, look into government resources available to residents of your state to help you cut down on living expenses.
A payday loan can help in an emergency when you have no other options — and it can even be less expensive than paying overdraft fees. But you might want to look into your cheaper alternatives first to avoid getting caught in a cycle of debt.
No — most payday lenders don’t report on-time repayments to the major credit bureaus, so they’re not a good option to build your credit. However, these types of lenders do report missed payments, which will hurt your credit. Instead, consider taking out a PAL, credit builder loan or secured credit card to improve your credit score.
Usually $10 to $15 per $100 borrowed, though it depends on the lender and where you live. Many states have limits to how much lenders can charge you for a payday loan, so check with your state’s laws to make sure your lender is acting legally. Payday loans from tribal lenders might cost more — they follow tribal laws rather than state laws.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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