Written by: Erica Sandberg
Edited by: Lillian Guevara-Castro
Payday loans are available in most states, and with them, you can borrow money against your future earnings. Just write a check for the amount you want, plus the lender’s fee.
State law regulates what these fees can be, but in general, payday lenders charge between $10 and $20 for every $100 you borrow. The lender then hands over the money, and you have a couple of weeks to repay the balance.
Before you pursue a payday loan, however, understand the pitfalls that are frequently associated with these products, as well as their sensible alternatives.
Pitfalls | Alternatives | FAQs
5 Payday Loan Pitfalls
While payday loans can be a convenient means of fast cash, these loans should only be used as a last resort. Let’s look at a few reasons why.
1. You may rely on them too often. If you find yourself at the payday loan office more than once or twice a year, something is wrong with your budget. It’s a sign that you are not earning enough to cover your essential expenses or you’re spending beyond your means. In either case, a payday loan is a Band-Aid rather than a cure because it’s not fixing the underlying financial issues.
2. The ability to roll the loan over. Most payday loans are arranged so you will pay off the balance within two weeks. Those two weeks can go by much faster than you anticipate, though, and if you don’t have all the money to clear the debt by the agreed-to date, you’ll have to pay another fee to keep the loan in good standing.
3. You’ll pay excessive fees. The fee for the initial loan is hefty compared to the amount you borrow, but subsequent fees on rolled-over balances are brutal. In fact, on an annual basis, a payday lender’s fees can equal an APR of 390% to 780% — far higher than what personal loans and credit cards will charge.
This map shows the average payday loan interest rate in each state.
4. You may not be able to afford next month’s bills. If you were struggling to cover your expenses before you took out a payday loan, you will have even less money available from your next paycheck to pay upcoming bills. You’ll have to cough up the balance due or pay the rollover fee, which will reduce the cash you’d normally have for your recurring expenses.
5. They don’t build credit. Unlike banks and credit unions, payday lenders do not report your borrowing and payment activity to the credit reporting agencies. Therefore, if you do pay the loan on time and in full, your responsible behavior won’t work in your credit’s favor.
5 Alternatives to Payday Loans
When you need a loan but don’t have top-notch credit, consider a lender that will offer you much better terms than those that come with a typical payday loan. The interest rates are guaranteed to be lower and the payments will be more affordable.
Here are some highly rated companies that help people who have no credit history or bad credit ratings connect with lenders.
1. MoneyMutual
- Short-term loans up to $5,000
- Online marketplace of lenders
- Funds available in as few as 24 hours
- Simple online form takes less than 5 minutes
- Trusted by more than 2 million customers
- See official site, terms, and details.
| Loan Amount | Interest Rate | Loan Term | Loan Example |
|---|---|---|---|
| Up to $5,000 | Varies | Varies | See representative example |
MoneyMutual allows you to borrow up to $2,500, and interest rates and terms vary by lender. To qualify, you’ll need to earn at least $800 a month. Upon acceptance, the money will be deposited into your bank account within 24 hours.
2. CashUSA.com
- Loans from $500 to $10,000
- Receive a loan decision in minutes
- Get funds directly to your bank account
- Use the loan for any purpose
- See official site, terms, and details.
| Loan Amount | Interest Rate | Loan Term | Loan Example |
|---|---|---|---|
| $500 to $10,000 | 5.99% - 35.99% | 3 to 72 Months | See representative example |
Loans of between $500 and $10,000 are available from CashUSA.com, with interest rates that range from 5.99% to 35.99%. Repayment terms are three months to 72 months (six years). You’ll need a monthly income of at least $1,000 after taxes to qualify.
- Loans from $250 to $5,000
- Cash deposited directly into your account
- Get money as soon as tomorrow
- Bad credit OK
- More than 750,000 customers since 1998
- See official site, terms, and details.
| Loan Amount | Interest Rate | Loan Term | Loan Example |
|---|---|---|---|
| $250 to $5,000 | Varies | Varies | See representative example |
If you need to borrow $250 to $5,000, CreditLoan can help. When approved, you will find out which lender will work with you, along with the interest rate and the number of months you have to repay. If your credit is very poor, a cosigner with good credit can help you qualify.
- Loans from $500 to $10,000
- Get connected with a lender
- Simple form & quick funding
- Get your money as soon as next the business day, if approved
- See official site, terms, and details.
| Loan Amount | Interest Rate | Loan Term | Loan Example |
|---|---|---|---|
| $500 to $10,000 | 5.99% - 35.99% | 3 to 60 Months | See representative example |
BadCreditLoans lets you borrow between $500 and $5,000, but if your credit is on the low end, you may be limited to a loan of only $1,000. Interest rates range between 5.99% and 35.99%, and payment terms of three to 60 months (5 years) are available. A regular income is required to qualify.
- Loans from $1,000 to $35,000
- Large lender network
- Fast loan decision
- Use the loan for any purpose
- Funding as soon as one business day, if approved
- See official site, terms, and details.
| Loan Amount | Interest Rate | Loan Term | Loan Example |
|---|---|---|---|
| $500 to $35,000 | 5.99% - 35.99% | 3 to 72 Months | See representative example |
Loans of up to $35,000 are available from PersonalLoans.com at interest rates between 5.99% to 35.99%. Terms can be as short as three months or as long as 72 months (six years). If your credit is particularly bad, the company suggests getting someone with good credit to act as a cosigner.
Can Payday Loans Hurt Your Credit?
Because payday lenders do not notify the credit reporting agencies that you have applied for the loan, your credit won’t be dinged with a hard inquiry when you apply. Nor will they list the amount you borrowed and whether you are maintaining a substantial debt.
Although this is the type of activity that indicates financial troubles, it will not be evident on your credit report.
Problems do arise when payday loans or their fees aren’t satisfied. At that stage, the debt will be in default and the lender will usually sell the unpaid account to a third-party collection agency. A collector does send information to the credit reporting agencies.
Late and/or defaulted payments hurt your payment history, which accounts for more than a third of your total credit score. Your score could drop 100 points or more if you don’t repay the loan.
When it does, your credit report will be negatively impacted because it clearly shows you did not pay the loan as agreed. Credit scores are developed from the information that is listed on your credit reports, and anything in collections will cause those numbers to drop.
How Can I Avoid Payday Loans?
Your first step to avoiding a payday loan is to carefully review your budget. Since these loans are usually quite small, you may find the money you need by reducing or eliminating superfluous expenses. Analyze every line item to determine whether you really need it or just want it.
If you can’t or don’t want to pare down spending, explore ways to increase your income. Is there anything you can do to earn extra money quickly?
For example, you may ask your boss for more hours, babysit, walk dogs, or drive for a ride-sharing company. Look around your home for things you can sell. Maybe you have some sports equipment that’s collecting dust or jewelry that’s not your style. If you can scrape together a few hundred dollars, the payday loan will be unnecessary.
If the reason you’re seeking a payday loan is to meet a pressing bill, contact that company and ask for help. Credit card companies may give you a hardship plan where payments are reduced or suspended for a couple of months. That can give you some breathing room.
If you’re short on rent, contact your landlord and ask if you can make a partial payment and make up the rest the following month. Utility companies can also be quite forgiving and may have special programs for people in need.
If you still want a loan but don’t want to borrow from a bank, you may also consider asking a friend or relative if they can help you out. Of course, this type of personal loan also comes with potential problems if you don’t repay the loan.
In the event you do not pay that person back, your valued relationship can be jeopardized. Only ask a friend or relative for a loan when you’re certain you can meet the payments.
Why Are Payday Loans Unethical?
Although payday lenders do facilitate high interest, short-term loans that can sound unethical, when you use them appropriately, you won’t get into trouble. The key is to visit these lenders very rarely and only when you know you’ll have the funds to easily repay the entire debt in a couple of weeks.
These companies can become problematic when they aren’t upfront about their terms or make it too simple for people to roll their debts over for many months. There is no question that the fees they charge on such extended balances are harmful to desperate borrowers.
While payday loans can help you out of a jam, they can also turn into a financial disaster. According to a Consumer Finance Protection Bureau report, about 45% of new payday loans are renewed multiple times, and 1 in 7 are renewed more than 10 times. For this reason, some states have banned them or have modified their practices.
Do the Math Before Agreeing to Any Loan
It’s best to steer clear of payday loans altogether, but if you still want to use one, step back and do the math before accepting the loan. The initial fee should be acceptable, and you will want to be sure you can and will pay the balance to zero by your next pay period.
If you can’t, explore other options. Borrowing money from a qualified lender and managing that loan properly will build your credit so you won’t need to pursue a payday loan when times get tough.
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