Key takeaways
- Payday loans are small, short-term loans usually due on your next payday.
- A typical $15 fee per $100 borrowed equals an APR of almost 400%, according to the CFPB.
- Many borrowers roll over or re-borrow, paying new fees each time.
- Lenders may get access to your bank account, which can lead to overdraft fees.
- Try alternatives first: your creditor, a credit union loan, an employer advance or local assistance.
When a bill is due before your paycheck, a payday loan can look like the fastest way through. It usually is fast. The problem is what it costs, and how often one loan turns into several. Here’s how payday loans work and what to try first.
How payday loans work
A payday loan is a small, short-term loan, usually due in a lump sum on your next payday, often in two to four weeks. To get one, you typically give the lender a post-dated check or permission to withdraw money from your bank account.
According to the CFPB, many state laws cap payday loan fees at somewhere between $10 and $30 for every $100 borrowed. Some states ban payday loans altogether.
What they really cost
The fee can sound small, but it’s for a very short loan. The CFPB says a typical two-week payday loan with a $15 fee per $100 equals an APR of almost 400%. By comparison, credit card APRs often fall between about 12% and 30%.
These numbers are only for illustration:
| Amount | |
|---|---|
| Borrowed | $400 |
| Fee at $15 per $100 | $60 |
| Due in two weeks | $460 |
If you can’t repay the full $460 on payday, you might pay another $60 to extend the loan, and still owe the $400.
The rollover trap
Many payday borrowers can’t repay the whole amount on time, because the same paycheck also has to cover rent, food and other bills. So they roll over the loan or take out a new one right after repaying the old one. Each time, there’s a new fee. After a few rounds, you can pay more in fees than you borrowed, and still owe the original amount.
Other risks
- Bank account access. If the lender withdraws money when your account is low, you can be hit with overdraft or returned-payment fees from your bank.
- Collections and lawsuits. An unpaid payday loan can go to collections, and the lender may sue you, depending on your state’s laws.
- Online lenders. Some online lenders aren’t licensed in your state. Check with your state’s financial regulator before you borrow.
Safer alternatives to try first
- Call the company you owe. Ask for a short extension, a payment plan or a hardship program. Many will work with you if you call before the due date.
- Credit union loans. Many federal credit unions offer small “payday alternative loans” with lower costs and longer repayment. You usually need to be a member.
- Employer pay advance. Some employers offer an advance on wages you’ve already earned.
- Local help. Call or text 211, or visit 211.org, to find help with rent, utilities and food.
- A credit card cash advance. It’s expensive too, but usually much cheaper than a payday loan.
- A nonprofit credit counselor. If you’re short every month, a counselor through the NFCC can help you find a longer-term fix.
If you already have a payday loan
- Ask about an extended payment plan. Some states require lenders to offer one if you ask. The CFPB has more on your options.
- Avoid rolling it over if you possibly can.
- Know your rights. If the loan goes to a collector, read your rights when a debt collector calls.
Prevent the next one
- Build a small cushion. Even a little savings can cover the gap next time. See how to build an emergency fund while you’re in debt.
- Find monthly savings. Our guide to lowering your monthly bills has ideas.
- Plan your month. A bare-bones budget helps you see shortfalls coming.
The bottom line
Payday loans are fast but very expensive, and they often lead to repeat borrowing. Before you take one, call your creditor, check with a credit union and look for local help. If you’re already in one, ask about a payment plan and avoid rollovers.
Sources: CFPB: what is a payday loan · 211.org · NFCC