Payday loans may look appealing in a cash crunch, particularly for people with low credit scores.
Finally, well explore some alternatives if it’s crucial that you borrow money before your next payday.
Here are few things to look into.
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What Is a Payday Loan?
Payday loans are sometimes referred to as cash advance loans or check advance loans.
Because they dont require collateral, payday loans are a bang out ofunsecured loan.
Payday loan services are available both online throughapps like EarnInand through storefront payday lenders.
The rules for payday loans depend on your state laws.
Many states limit the interest rates or the maximum loan amount or the loan term.
A handful of states ban payday loans altogether.
In recent years, though, many states have cracked down on high-interest payday loans.
Not surprisingly, payday lenders have fled states that have imposed interest caps.
The Pew Charitable Trusts reports that payday lenders operated in 32 states as of 2022.
By 2024, according to the Consumer Federation of America, that number haddropped to 29 states.
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How Does a Payday Loan Work?
Most payday lenders dont require a credit check to borrow money.
Nor do they consider your expenses, debt or ability to repay the loan.
Payday lenders also wont report payments to the credit bureaus, so the loan wont appear on yourcredit report.
Payday loan borrowers typically need to provide identification, proof of income and bank account information.
The due date and repayment terms for the loan will be included in the loan agreement.
Many payday loans are due in one lump sum payment.
However, some payday loan lenders also allow the money borrowed to be repaid in installments.
A $15 fee per $100 borrowed is fairly typical.
A $15 charge on a $100 loan may not sound like much.
Payday loans are one of the most expensive sources of consumer credit.
By comparison, the average credit card APR was 21.47% in the fourth quarter of 2024.
For a 24-monthpersonal loan, the average APR was 12.32%, according to theFederal Reserve.
Remember: The lender has access to the borrowers bank account or a pre-dated check.
When you dont have the funds to cover repayment, you could incur heftyoverdraft feesfrom your bank.
If the loan causes other transactions to bounce, the loan could result in multiple fines.
Drowning in Expenses?
Maybe youre scrambling after your car broke down.
Or you got a medical bill you werent expecting.
Or inflation has finally pushed your budget over the edge.
You dont need to go it alone.
When money is tight,these resourcescan help you manage unexpected expenses without stress.
That means Amy needs to come up with $300 fast.
To borrow $300, Amy has to pay a $45 finance charge.
That doesnt sound like a lot.
But the loan is due in 14 days, on Amys next payday.
That means Amy is paying an APR of nearly 400%.
But when the loan comes due, Amy doesnt have $345.
The money she borrowed went toward her higher rent and daycare expenses.
So she pays a $45 fee to roll over the loan.
She now has spent $390 on her $300 loan.
Thats $795 total to pay off a $300 loan.
Unfortunately, chances are high that Amy will take out more payday loans.
Roughly 1 in 5 borrowers will take out 10 or more payday loans.
What if You Cant Afford to Repay a Payday Loan?
If you cant repay a payday loan, you might expectdebt collectorsto start hounding you.
(In fact, its illegal for debt collectors to falsely tell you youll be arrested over debt.)
Prioritize rent, food, medications and vehicle payments if you need your car for work.
Consider these options forpayday loan relief.
That doesnt change the amount you owe, of course.
you might expect the payday lender to continue its collection efforts.
Many financial institutions also will charge you a fee.
As a result, many payday borrowers dont know whom they actually owe.
Regardless of your states law, its often in a lenders interest to work with you.
Another option is to tell the lender youre so overwhelmed by bills that youre considering bankruptcy.
Just verify youre being honest about your ability to pay them back.
Consider taking on aside gigor finding other options formaking money fast.
Payday Loan Alternatives
If you havent taken out a payday loan yet, you have other options.
Here are somepayday loan alternativesto consider first:
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Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.
She writes the Dear Penny personal finance advice column.
Send your tricky money questions to[email protected].
