Payday loans are advertised as fast and helpful ways to get money to cover an unexpected expense. However, payday lenders can often use predatory practices to get borrowers to accept loan terms that severely damage their long-term financial health.
A payday loan is a high-cost, short-term unsecured loan that has a principal that is a portion of your next paycheck. Payday loans are often for small amounts of money, commonly $500 or less. Payday loans provide immediate funds, come with extremely high interest rates, and are usually based on your income.
Payday loans are usually paid back within two to four weeks, and you can get them at a brick-and-mortar payday lender or online. Lenders usually don’t conduct a full credit check or take your ability to pay the loan back into account.
Different states have different laws when it comes to payday loans; some states ban payday loans entirely, while others cap the interest rates that lenders can charge.
You might be put in a position where you feel like you have to take out a high-interest loan to cover an expensive medical bill or rent check, but you should try to avoid payday loans if at all possible.
With exorbitantly high interest rates, payday loans can end up costing more than you initially borrowed and can trap you in a cycle of debt. Additionally, payday lenders often target low-income, minority communities and convince them to accept confusing loan terms.
Local nonprofits, churches, family members, personal loans, and even some credit cards are better options for emergency assistance funds than payday loans, said Graciela Aponte-Diaz, the director of federal campaigns at the Center for Responsible Lending.
“What we’ve seen in states that don’t have payday loans is that there are various resources to help people during emergencies or hardship, but they are out marketed in states that have predatory lending,” Aponte-Diaz said.
Before you’re in a situation where you’re staring down a payday loan, you might consider building an emergency fund to cover three to six months worth of living expenses if possible.
You can find personal loan alternatives to payday loans more with our lists of the best small personal loans and the best personal loans for bad credit.
Consider any alternatives you have to payday loans before deciding to get one, as they come with a lot of risk.
A payday loan is a short-term, high-cost loan that must be paid back on or before your next payday, whether your income is from employment or government benefits. Payday loans are made by storefront lenders, check cashers, pawn shops, credit unions, and Internet-based providers. Publication #0600EN