If you are looking for a small loan you may be tempted to use a payday lender. They finally make it that simple: come on in, provide some basic info, and go with the money you need. Payday loan companies never check your creditworthiness or contact the credit bureaus (unless you don’t pay the loan as agreed).
And if you live in any of the 37 states where payday loans are legal, you will have no problem finding a stationary payday loan office. If you’d rather not leave home, you can even get an online payday loan.
Before you do that though, let’s talk.
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This is how payday loans work
Let’s say you want to borrow $ 300 from a nearby payday lender. They require you to see your ID and proof of income (like a pay slip). There is no credit check. They give you a contract of about a million words in fine print.
Your advertised rate doesn’t seem that bad. Although the contract they are selling tells the real cost of the loan, it’s easy to miss. Pay close attention to the APR even if you are in a hurry. The APR is what you actually pay to borrow the money. It includes the advertised interest rate but also a variety of fees that are added to your debt.
According to the Consumer Financial Protection Bureau (CFPB), the fees on a payday loan can be challenging. Typically, payday lenders charge a percentage for every $ 100 borrowed – $ 15 per $ 100 is common. So if you borrow $ 300, you immediately add $ 45 to the amount you owe. before Include interest. There is an issuing fee, potential late fees, and possibly a fee, if the lender puts your funds on a prepaid debit card.
The average “real” loan interest rate from a payday lender is around 400%. The people who are hardest hit are those in states with no protection from payday loans. CNBC recently broke down which states allow payday lenders to charge the highest APR:
- Texas 664%
- Idaho 652%
- Nevada 652%
- Missouri 527%
- North Dakota 526%
- Mississippi 521%
- Wisconsin 516%
- Louisiana 478%
- Kentucky 469%
- California 460%
- Tennessee 460%
- Alabama 456%
- Alaska 435%
Once you have signed the loan documents, the payday lender will ask you to write a check for the total amount owed, including interest and fees. They ask you to pre-date the check two weeks. At the end of these two weeks, the check will be deposited and the amount will be debited from your bank account. If you do not have the money to cover the loan, you will need to notify them prior to depositing the check so that you can avoid an overdraft fee.
It may not surprise you that most borrowers cannot pay off their loans within two weeks. Finally, they have to pay rent, food and other bills. And now they have a loan with a sky-high interest rate and all sorts of fees.
So what if you can’t repay your payday loan? The lender will be happy to offer you another loan to settle the first.
Let’s say the balance on your $ 300 loan has increased to more than $ 400. You borrow $ 400 to pay off the first loan, and the lender will charge you an additional $ 60 in fees ($ 15 for every $ 100). They will likely also charge a “rollover fee” of around $ 45. So, two weeks after borrowing $ 300, you are over $ 505 in debt (before Interest) – all because you had to take out a second payday loan.
Payday loans are very easy to come by, but payday loan debts are hard to come by. Because of the way these predatory lenders work, even small payday loans can be costly.
With around 23,000 payday lenders spread across the 37 states they operate in, you won’t have any problem getting a payday loan if that’s really what you want to do.
Before you write that post-dated check, however, you should consider the alternatives:
Help with invoices
There’s no shame in being tight on cash. Millions of Americans are in the same boat, doing everything possible to get through. If you’re considering a payday loan because a utility has been cut off, the refrigerator is empty, or you don’t have the money to buy your child’s school supplies, help is there. Before signing up with a predatory lender, check with an organization that wants to help you. USA.gov is an excellent starting point for information on government assistance, including emergency food procurement.
Another great resource is Need help paying bills. With an easy to navigate menu on the home page, Need Help Paying Bills directs you to help you with any financial problems you may have. They’ll advise you to help pay utility bills, find blackboards near you, get free professional training, and even go to free dental clinics. There are few resources as comprehensive as Need Help Paying Bills.
We rarely recommend taking out a cash advance on a credit card, but if you are in need it is better than a payday loan. Let’s say you live in Louisiana and your payday lender charges 478% APR on a short-term loan. Suddenly paying 35% (or whatever your credit card company charges for a cash advance) feels like a bargain. It isn’t, but if you can plan to pay off the cash advance quickly, you are in better shape than with a payday loan.
One important thing to keep in mind with cash advances: The interest starts as soon as you withdraw the money. Come up with a plan on how you will pay it off in full.
Here are a few other ideas to make money when you need it:
Private loan. Don’t count yourself out if you have bad credit. There are some good personal loans for bad credit, and although some of our favorites charge up to 35.99% interest, that beats the interest charges on payday loans. A personal loan has a fixed interest rate and an installment loan, so you know exactly what your monthly payment will be.
Family and friends. It can be difficult to get credit from the people you care about, but as long as you are sure that you will get the money back promptly, it can’t hurt to ask.
Credit union. If you are a member of a credit union, you are considered a member of the association. Credit unions tend to be more flexible with their member owners, especially if you’ve been with them for a while.
If you do decide to take out a payday loan, there is a good chance that you will have no problem finding one. There are almost twice as many payday lenders in the US as there are McDonald’s locations. Before doing so, however, there are a few ideas that we should consider carefully. When it comes to small loans, almost any alternative is better than payday loans.