If you’re looking for ways to get quick cash and found yourself asking, “What is a payday loan and how do I get one?” then stop. Payday loans are usually short-term loans that you have to pay back within a few weeks, typically on your payday. They sound like a simple way to get cash fast, but they can get complicated and can cost you so much in interest that you can end up deeper in debt you can’t afford to repay.
Payday loans are generally loans for $500 or less, according to the Consumer Financial Protection Bureau. Sometimes payday loans are referred to as bad credit loans because they’re available to people with less-than-stellar credit. People who earn between $15,000 and $25,000 per year make up the largest demographic that uses payday loans, according to the Pew Charitable Trusts’ most recent data.
You can take out these loans in person at payday loan lenders or online from lenders like ACE Cash Express, National Payday and CashNetUSA, to name a few. To qualify, you must be 18 years old and have a checking account, valid ID and proof of income, according to the CFPB. Some lenders will run a credit check, but many offer payday loans with no credit check. If you’re trying to figure out how to get a loan with bad credit, check all of your options before you take out a payday loan.
Why Payday Loans Can Be Financially Dangerous
Payday loans can be risky. The interest they carry can be extremely high, according to the CFPB. The most expensive payday loans are offered in Ohio with an average annual percentage rate of 591 percent, according to the Pew Charitable Trusts, which is four times higher than Colorado’s average payday loan APR of 117 percent.
Some payday loan contracts explain that the lender will charge $15 per $100 borrowed, which can appear to equate to 15 percent interest. But there’s a catch.
You pay a credit card’s interest rate per year, which is why it’s called an annual percentage rate. A payday loan interest rate works like this example from the CFPB: In two weeks from the date you get the loan, you’ll pay $115 for every $100 you borrow. That two-week payday loan — at $15 for every $100 borrowed — equates to 400% APR.
If you can’t pay your loan back on time, some payday lenders will offer to “renew” or “rollover” your loan. For example, if you renew a $300 payday loan with a $15 fee per $100, you’ll owe $45 plus the $300 in principal for the initial term. If you roll it over for another term, or two weeks, you’ll owe another $45 on top of the original $45. Roll it over a second time, and you’ll owe a total of $135 plus the initial $300. That translates to paying back a total of $435 for a six-week loan of $300.
In this kind of cycle, you could turn what should be a short-term loan into a long-term debt with a much higher interest rate than a long-term personal loan could offer. Reputable payday loan providers will give you full disclosures of the loan terms before you sign.
Payday Loans Can Be a Security Risk
Another risk associated with payday loans is security, especially if you are using online payday loans. Many sites you might think are direct lenders are actually “lead generators,” according to the CFPB.
Lead generators take your sensitive information — like your Social Security and bank account numbers — and send them to a variety of lenders. Your information will get into many hands, which is a major reason to be careful if you’re considering payday loans online.
Payday Lending Laws
Laws regarding payday loans vary by state. Some states don’t allow payday lending storefronts at all, according to the CFPB. Check the Payday Loan Consumer Information website to discover the laws and limits of payday loans in your state.
The website lists the specific limits payday lenders can charge. For instance, lenders in California can charge 15 percent of the loan amount with a maximum fee of $17.65 per $100. The website calculates the APR for a 14-day, $100 loan — which in this case would be 459 percent — and provides other information on these types of loans.
Payday Loan Alternatives
If you have an account with a bank or a credit union, you might be able to get a short-term loan there — especially if you have direct deposit — according to the CFPB. Some employers, nonprofit organizations and community groups offer emergency loan options, as well. Other alternatives to payday loans include pawn loans and borrowing money from family and friends.
You also could apply for or opt for a cash advance through your credit card. The interest might seem high, but remember, that’s a yearly interest rate. For instance, a $100 credit card cash advance with a 15 percent interest rate would cost $15 over an entire year, or 57 cents per two weeks. A payday loan for the same amount at 15 percent per $100 borrowed would cost $15 per two weeks.
If you need money fast, explore all your options before you sign up for the quick money a payday loan promises. If you can avoid this type of loan, you’ll likely be much better off.