What You Need to Know about Payday Loans

No matter how the U.S. economy is trending, the reality is that many people are still struggling to pay their bills each month. Some turn to payday loans to get the fast cash they need, but this type of borrowing may make your financial situation worse and trap you in a cycle of high-interest borrowing.

What is a payday loan?

A payday loan is a short-term, high-cost loan that typically allows you to borrow up to $500 with repayment due on your next payday.¹ The borrowing amounts on payday loans may vary depending on the lender. In some states, payday lending is either banned by law or payday lenders choose not to operate due to restrictions on interest rates and fee regulations.²

How do payday loans work?

To get a payday loan, you just need to have an open bank account in good standing, a reliable source of income and a valid form of ID. Payday lenders typically don’t check your credit history, and these loans don’t require collateral, like a car, to secure the loan. The payday lender focuses on your ability to repay the loan when you get your next paycheck.

Once you are approved for the payday loan, you can generally receive funds in one of two ways: cash or direct deposit. If you are receiving the payday loan in cash, you will need to write a personal check to the lender for the amount you are borrowing plus any fees. The lender gives you the cash and holds that check, usually until your next payday. If you receive the payday loan by direct deposit, the lenders will need to arrange electronic access to your checking account to deposit funds into that account. You’ll usually receive the funds by the next day.

On your next payday, you must pay the lender back in full along with additional fees, which can range from $10 to $30 for every $100 you borrow. It’s important to note that if you authorized the payday lender to take automatic payments from your checking account, they may automatically debit the amount you borrowed plus fees, whether you have the funds available or not. If your account does not have enough funds, your bank may end up charging you an overdraft fee.

What happens if you can't pay back the loan on your next payday?

If you do not have the money to pay back the full amount you borrowed plus any fees, you may be able to roll the loan over to the next payday.³ But you’ll then have to pay additional fees to pay off what you owe, plus all the fees you've built up. The annual percentage rate (APR) on payday loans can also be extremely high, sometimes reaching 400% or more because of the short repayment term. This can make it very difficult to break free from the debt cycle once you’ve taken out a payday loan.⁴

If you can't pay back what you borrowed, the lender might eventually pass your debt to a collection agency or hire an attorney to collect the balance of the payday loan plus fees.5

Can payday loans hurt your credit?

If you don’t repay your loan and the debt is sold to a collection agency, it could be reported to the major credit bureaus and negatively impact your credit score.⁶

Smart alternatives to high-rate payday loans

If you find it challenging to pay your monthly bills, there are a number of different approaches you can take before you resort to a payday loan:

Talk to your creditors

Talking to your creditors may help. Contact them and ask them if you can set up a payment plan to lower your monthly payment. At OneMain, we encourage customers who are having trouble making payments to contact us as soon as possible so we can work together to get back on track.

Try a bank, credit union or licensed lender

Look into a personal loan from a bank, credit union or licensed lender like OneMain Financial. These lenders often offer short-term loans at much lower rates than payday lenders.

With a OneMain personal loan, you could get the certainty of a fixed interest rate and predictable monthly payments over a period of time that suits your financial situation.

Peer-to-peer lending

Consider borrowing from family or friends. But keep in mind that borrowing from family and friends could put stress on your relationships if you don't pay the money back in a timely manner.

If you go this route, consider writing up a repayment agreement before they lend you the money, so everyone is aware of and agrees to the expectations moving forward.

Explore a cash advance from your credit card

Cash advances typically have higher APRs than most secured personal loans. The annual percentage rate shows how much interest you pay each year on the money you borrow. There’s also a transaction fee that comes with taking out a cash advance and finance charges start building right away. However, cash advance rates are significantly lower than payday loans.

So are payday loans a good idea?

Although it may seem to offer a speedy solution when you need cash fast, a payday loan is not a long-term solution for your financial needs. It is a short-term loan with high costs. The problem with a payday loan is that while the fees may seem low at first, it is actually more expensive when you consider the annual percentage rate the lender is charging. Rolling over your payday loan could potentially end in a cycle of debt, which could make it a risky choice.

As always, it’s important to consider your needs and financial situation before deciding which option is best for you and your future financial goals.

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Sources:

1,2. https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/
3. https://www.consumerfinance.gov/ask-cfpb/what-does-it-mean-to-renew-or-roll-over-a-payday-loan-en-1573/
4. https://www.consumerfinance.gov/ask-cfpb/my-payday-lender-said-my-loan-would-cost-15-percent-but-my-loan-documents-say-the-annual-percentage-rate-apr-is-almost-400-percent-what-is-an-apr-on-a-payday-loan-and-how-should-i-use-it-en-1625/
5,6. https://www.bankrate.com/loans/personal-loans/what-happens-when-you-cant-repay-a-payday-loan/

*This article has been updated from its original posting in 2014, 2018 and 2019. Matt Diehl and Kim Gallagher contributed to this post.