Payday loans are designed to help you through small emergencies and bridge the gap between your paydays. However, they can be very expensive.
Typically, payday lenders don’t do credit checks and their repayments don’t appear on your credit report. This makes them accessible for borrowers with bad credit scores.
However, they often catch borrowers in a debt trap through multiple extensions and rollovers of their loan, which leads to additional charges.
Interest Rates
The high interest rates associated with payday loans can make them more expensive than they appear. In fact, the average annual percentage rate (APR) for a two-week loan is 391%, according to the Consumer Financial Protection Bureau.
These high rates can be hard to understand, so it is important to shop around before deciding to take out a payday loan. There are lenders who offer loans with much lower rates, including some online lenders that do not require an in-person visit.
In addition, many local charities and churches are willing to lend money at no cost to help people out of tough times. Additionally, many community banks and credit unions are able to lend smaller amounts of money on easier terms than the big national banks. Credit card cash advances also have lower rates than payday loans. But you should always compare rates before choosing a lender. A good credit history can open doors to loans with even better terms.
Fees
Payday lenders typically charge a fee per amount borrowed. This can range from $10 to $30 for every $100 borrowed, depending on state law and the maximum amount that can be lent. A fee of $15 per $100, for example, would equate to an annual percentage rate (APR) of 391% on a two-week loan.
According to Pew, many borrowers rely on payday loans to cover basic expenses, like food and utilities. But the high fees associated with these loans can make them unaffordable, leading borrowers to renew or refinance their loans multiple times.
Consumers who struggle to meet repayment obligations should consider alternative lending options. Credit unions, for instance, may offer lower rates and more flexible repayment terms than payday lenders. They also report borrower payment history to the credit bureaus, helping borrowers build their credit over time. Also, some prepaid cards have low credit requirements and can be used to help manage cash flow.
Rollovers
Unless you're able to repay your payday loan in full when the due date arrives, you may end up in a cycle of debt. Lenders typically demand a postdated check for the total amount of the loan plus fees, or they authorize an electronic withdrawal from your bank account. If your check bounces, the lender can try to recover costs through collections.
When you don't have enough money to cover a payment, payday lenders may allow you to roll over your loan, or extend the due date. If you do, the total cost of your loan can soar quickly.
If you're an active-duty service member or the dependent of one, you have special protections through the Military Lending Act. These protections include a 36% cap on the Military Annual Percentage Rate and limitations on payday, refund application, deposit advance and installment loans. You can also ask for help from your local Judge Advocate General's office.
Legality
When money is tight, some consumers seek payday loans. However, these high-interest cash advances can trap borrowers in a cycle of debt that is hard to escape. Some states have passed reforms to protect borrowers, including rate caps and other safeguards.
For example, New York law requires lenders to make payday loans only in person and prohibits the practice of lending online, by telephone or via electronic fund transfer. It also bars debt collectors from collecting payday loan-related debts. And the Military Lending Act imposes a 36% rate cap on tax refund loans, payday and auto title loans to active duty service members and their covered dependents, TN as well as unsecured open-end credit.
Many states have capped small loan rates and some have criminal usury laws. Each state page links to the citation of the relevant law and includes information about how to file a complaint. In some states, lenders have switched to offering other kinds of high-cost credit or have found loopholes in the laws governing them.