What is a Payday Loan?

  • Payday loans offer a quick influx of cash but should be viewed as a last resort.
  • With payday loans, you could pay interest that is 400% APR or more.
  • Alternatives are local nonprofits, churches, family members, and personal loans.
  • Read more about Personal Finance Insider’s credit coverage here.

Payday loans are advertised as a quick and helpful way to raise money to cover an unexpected expense. However, payday lenders can often use predatory practices to trick borrowers into accepting loan terms that seriously damage their long-term financial health.

What is a Payday Loan?

A payday loan is an expensive, short-term, unsecured loan the principal of which is part of your next paycheck. Payday loans are often for small amounts of money, usually $ 500 or less. Payday loans offer instant funding, 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 stationary payday lender or online. Lenders typically don’t do a full credit check or consider your ability to repay the loan.

Different states have different laws when it comes to payday loans; some states prohibit payday loans entirely, while others limit the interest rates that lenders can charge.

You might find yourself in a situation where you feel like you need to take out a high-interest loan to cover an expensive medical bill or rental check, but you should try to avoid payday loans whenever possible.

With exorbitant interest rates, payday loans can end up costing more than you originally borrowed, and you can get trapped in a debt cycle. Additionally, payday lenders often target low-income minority communities and convince them to accept confusing loan terms.

What are the disadvantages of a payday loan?

What are the alternatives to the payday loan?

Local nonprofits, churches, family members, personal loans, and even some credit cards are better emergency fund options than payday loans, said Graciela Aponte-Diaz, federal campaign director at the Center for Responsible Lending.

“What we’ve seen in states with no payday loans is that there are various resources to help people in an emergency or hardship, but they are marketed in states with predatory loans,” Aponte-Diaz said.

Before you find yourself in a situation where you turn down a payday loan, consider building an emergency fund to cover living expenses for three to six months if possible.

For more personal loan alternatives to payday loans, check out our lists of the best small loans and the best personal loans for bad credit.

Consider all of the alternatives to payday loans before choosing one as they are associated with high risk.


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