- Payday loans provide a quick influx of money, but should be viewed as options of last resort.
- You could pay interest rates equivalent to 400% APR or more with payday loans.
- Alternatives include local nonprofits, churches, family members, and personal loans.
- Learn more about Personal Finance Insider loan coverage here.
Payday loans are touted as a quick and helpful way to get money to cover an unexpected expense. However, payday lenders can often use predatory practices to trick borrowers into agreeing to loan terms that seriously damage their long-term financial health.
What is a payday loan?
A payday loan is a short-term, high-cost unsecured loan with the principal portion of your next paycheck. Payday loans are often for small amounts of money, usually $ 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 repaid within two to four weeks, and you can get them from a physical or online lender. Lenders usually don’t do a full credit check and don’t consider your ability to repay the loan.
Different states have different laws regarding payday loans; some states ban payday loans entirely, while others cap the interest rates that lenders can charge.
You might find yourself in a situation 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 whenever possible.
With sky-high interest rates, payday loans can end up costing more than what you initially borrowed and trapping you in a cycle of debt. Additionally, payday lenders often target low-income minority communities and convince them to accept confusing loan terms.
What are the disadvantages of a personal loan?
What are the alternatives to payday loans?
Local nonprofits, churches, family members, personal loans and even some credit cards are better options for emergency aid funds than payday loans, said Graciela Aponte- Diaz, director of federal campaigns at the Center for Responsible Lending.
“What we have seen in states that don’t have payday loans is that there are various resources to help people in times of emergency or hardship, but they are marketed in states that have predatory loans, ”said Aponte-Diaz.
Before you find yourself in a situation where you are considering a payday loan, you may want to consider setting up an emergency fund to cover three to six months of living expenses, if possible.
You can find personal loan alternatives to payday loans with our lists of the best small personal loans and the best personal loans for bad credit.
Consider all the alternatives you have to payday loans before deciding to get one, as they come with a lot of risk.