Taking out a payday loan might seem like a great way to get cash quickly. But payday loans—in the states that allow them—have significant downsides. These loans normally come with punishing interest rates and short repayment timeframes. Before you apply for a payday loan, you should fully understand these loans and seriously consider the costs involved, as well as the risks. You might change your mind about getting one.
A payday loan is a short-term loan from a payday loan company or online vendor—not a bank—that usually becomes due on your next payday or the next time you get income from some other regular source, like Social Security. Normally, payday loans are relatively small, around $500 or less. In fact, state law often limits the maximum loan amount. (For further information about payday loans, see How Payday Loans Work.)
Payday lenders typically charge a fee of between $10 and $30 for every $100 of the payday loan amount.
Example. Suppose you borrow $400 from a payday lender today. The lender charges a fee of $15 per $100 borrowed, so you'll have to pay the lender $460 in a couple of weeks. Unfortunately, when the due date comes around, you can’t afford to repay the payday loan. So, because your state doesn’t ban or limit loan renewals, you “roll over” (extend) the loan and push the due date out by another couple of weeks. To do this, you have to pay another $60 fee. When the loan comes due again, you pay the lender the $520 you owe. You've now paid $120 to borrow $400.
Clearly, payday loans are a very expensive way to borrow money. The annual percentage rate (APR) on payday loans often ranges from 200% to 500%. Continuing with the example above, the APR on a two-week loan with a $15 fee per $100 borrowed is around 400%. Also, as you can see, it’s easy to get onto a treadmill of debt—taking out one payday loan after another.
If you go online to get a payday loan, rather than visiting a store, and fill out an online application, you might be giving your information to a “lead generator” rather than a company that actually offers loans.
Lead generators earn money by gathering your personal information—like your Social Security number, bank account information, date of birth, address, and other confidential data—and then turning around and selling it to payday lenders or others, including scammers in some cases. Courtesy of a large online network of people trying to buy and sell payday loan leads, your personal and financial information could easily end up in the wrong hands. Be very careful if you apply for a payday loan online. (Learn what to do if a thief steals your identity.)
If you're having financial troubles, consider other options instead of taking out a payday loan, like:
To get an explanation of payday lending laws in your state, consider contacting a consumer right lawyer.