If you’re short on cash, you’re not alone. But before you take out a payday loan, let’s review what they are, why you should avoid them — and who you can borrow money from instead.
What is a payday loan?
A payday loan is a short-term, unsecured loan that usually comes with a high interest rate. Most payday loans come in modest amounts — typically $500 or less.
With a traditional loan, you receive a lump sum and then start to make payments back over a set amount of time — from a few months to a few years — with a “reasonable” rate of interest added on. With a payday loan, the full amount comes due all at once, including the interest and fees. With most, you’re required to write a postdated check for the full amount due — the loan, plus interest and fees — or give your lender permission to debit the money from your bank account on that date.
Interest rates for payday loans are much higher compared to traditional loans. A standard APR for a personal loan ranges from 6% to 36% — but may lenders offering payday loans charge annual rates of 100% or more, and some have been found to exceed 1,000% according to a 2013 ProPublica investigation. That noted, some states have limitations on interest and fees — and in some states, payday loans are altogether prohibited.
It’s also worth noting that payday loan lenders tend to target people who live in areas where poverty rates are high and income levels are low — as well as minorities and economically disadvantaged groups, who may have traditionally had greater difficulty qualifying for conventional loans, according to a study by the St. Louis Fed.
There are twice as many payday loan lenders than McDonald’s restaurants in the US — and borrowing money from one is about as easy as ordering a burger and fries. Getting approved is relatively easy: Many payday loan lenders won’t even check your credit , so a tarnished credit history won’t be a factor.
That’s an advantage for people with poor or limited credit histories. But the high interest rates and strict repayment terms force many into a payday loan trap where they’re forced to take out new loans just to pay back existing ones.
If you don’t have enough cash to repay your loan by its due date, the lender can automatically trigger a withdrawal from your bank account. And if you don’t have enough money in your bank account to cover the charge, you could face an additional hit from an “insufficient funds” penalty. You may also be subject to penalties from the lender if they don’t get your money on time.
If your state allows payday loan lenders, you might see them in some parts of your city and not others. For payday loans KY instance, there might be more of them where poverty rates are high and income levels are low. These types of lenders tend to target minority groups as well as those who have very low credit scores who don’t otherwise qualify for traditional loans.
Payday loan alternatives
If you’re in urgent need of money to cover basic expenses, buy food or pay off high-interest debt, there are other options to consider. Here are a few:
There are lots of personal loans available online that more reasonable interest rates. Even if you have less-than-stellar credit, some lenders may look beyond your= credit score when evaluating eligibility.
- OneMain Financial doesn’t have a minimum credit score requirement and you can borrow as little as $1,500, depending on where you live. APRs range from 18% to % and terms are two to five years. They also have an option for prequalification to see if you’re eligible without applying first.