9 Things to Look Out for When Considering a Payday Loan

When you’re strapped for cash and the bills are piling up, you might be tempted to take out a payday loan. A payday loan is a type of short-term borrowing where a lender extends high-interest credit based on your income.

Its principal is typically a portion of your next paycheck. These loans are also known as cash advance loans or check advance loans.

While these quick-fix loans can provide immediate financial relief, they also come packed with extremely high-interest rates and fees that can plunge you into a cycle of debt. In fact, payday loans can be so harmful to your financial health that they’re often considered a last-resort solution. 

If you’re considering this path, it’s crucial to tread carefully and arm yourself with the knowledge to navigate the choppy waters of payday lending and hopefully steer clear of its lurking hazards.

How Payday Loans Work

Applying for a payday loan is relatively simple. To qualify, you’ll need to prove you have an income—this could be a job, social security, or perhaps unemployment benefits. Additionally, you’ll need a valid checking account and be at least 18 years old.

Once approved, the borrower will write a check for the loan amount plus a lending fee. The lender holds onto this check and agrees to cash it on the borrower’s next payday or another set date within the next few weeks. Alternatively, the borrower may give the lender electronic access to their bank account to retrieve the loan’s payment. 

Payday Loan Providers

Here are a few examples of payday loan companies operating both online and in physical storefronts:

• CashNetUSA offers payday loans up to $500 depending on the state where you live. The costs of borrowing vary widely, depending on the loan amount and your location. 
• Check ‘n Go provides payday loans throughout the country. Loan amounts and requirements may vary by location. 
• Advance America operates in multiple states across the U.S., with loan amounts and terms varying by state. 
• Speedy Cash provides payday loans at locations nationwide. 

Unfortunately, not all payday lenders are reputable. Some predatory lenders exploit people in desperate financial situations with misleading terms and hidden fees.

4 Risks Involved

Payday loans come with serious risks that can trap borrowers in a cycle of debt.

1. High-interest rates can quickly turn a small loan into a significant debt. Payday loans can have interest rates upwards of 400% APR, far higher than most other forms of credit, making them a costly option for quick cash.
   
2. Payday loans often come with fees and additional costs, including origination, service, and late payment fees, which can quickly add up. You may be hit with a rollover or renewal fee if you need more time to repay your loan. Moreover, if the lender attempts to cash the check or make an automatic withdrawal and the account doesn’t have enough money, the borrower will face hefty insufficient funds fees from both their bank and the lender.
   
3. You may end up in a debt cycle if you have trouble repaying your loans, leading to more fees and a cycle of debt that’s hard to break.
   
4. While most payday lenders don’t report on-time payments to the credit bureaus, they will often report if you can’t repay your loan. This can negatively affect your credit score, making it harder to borrow money in the future.

5 Additional Factors to Be Conscious of 

1. Repayment Terms: Payday loans typically have very short repayment terms, often around two weeks. Ensure you’ll have enough money to repay the loan, interest, and fees by the due date.
   
2. Lender’s Reputation: Unfortunately, not all payday lenders are reputable. Research and check out the lender’s customer reviews and ratings on the Better Business Bureau website. Avoid lenders who have been flagged for unethical practices.
   
3. Loan Rollover: If you’re unable to repay the loan by the due date, some lenders might offer a rollover or renewal, which extends the due date for a fee. This can lead to a cycle of debt, where you’re continuously paying more fees without reducing the loan principal.
   
4. Debt Collection Practices: If you fail to repay the loan, lenders can be aggressive in their debt collection practices. Make sure you understand what actions the lender can take if you default on the loan.
   
5. Legal Regulations: The laws surrounding payday loans vary widely from state to state. Some states have strict regulations that limit interest rates, fees, and the amount you can borrow, while others ban payday loans altogether.

When Might a Payday Loan Benefit Someone?

Despite the risks, there can be situations where a payday loan seems like the only solution. They can benefit those with poor or no credit history who need immediate access to cash for emergencies. If used responsibly and paid back immediately on the next payday, it can solve a one-off financial crisis.

Alternatives to Payday Loans

Always approach high-interest solutions like payday loans with extreme caution. It’s essential to explore other options before payday loans. Before turning to payday loans and potentially falling into a debt cycle due to their high costs, consider these alternatives:

• Personal Loans: Personal loans typically come with lower interest rates and longer repayment periods than payday loans. Banks, credit unions, and online lenders offer these loans.
• Credit Card Cash Advances: If you have a credit card, you might be able to get a cash advance from an ATM up to a certain limit.
• Peer-to-Peer Lending: Platforms like LendingClub and Prosper connect borrowers with individual lenders. These loans have fixed interest rates and a fixed repayment schedule.
• Paycheck Advance Apps: Apps like Earnin and Dave allow you to access a portion of your next paycheck before payday. Some of these services are based on tips or small membership fees rather than typical interest charges.
• Family and Friends: Borrowing from someone you know can be one of the cheapest ways to get quick cash. Just make sure to discuss repayment terms and timelines to avoid potential issues.
• Community Assistance Programs: Many communities have local charities and non-profit organizations that offer financial assistance.
• Sell Unneeded Items: Selling unused items online or at a local consignment shop can provide a quick cash infusion.

Often, the best way to manage financial emergencies is through preventive measures, like building an emergency fund and maintaining good credit.