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Easy Money? What You Need to Know about Payday Loans

Easy Money? What You Need to Know about Payday Loans

By Matt Diehl • November 28, 2018

Regardless of how the U.S. economy performs, the reality is 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 can make your financial situation worse and trap you in a cycle of high-interest borrowing.

How Do Payday Loans Work?

Payday loans are small, short-term fast cash loans. To get a payday loan, you 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. On that day, you must pay them back in full. Some lenders ask for electronic access to your checking account and deposit funds in that account. They can also automatically debit the amount borrowed plus fees if you do not pay back the loan on time and in full.

How Do You Qualify for Payday Loans?

It’s pretty easy. There is no credit check and no collateral is required to secure the loan. And you usually receive the funds the next day.

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 can often roll the loan over to the next payday. But you’ll then have to pay additional fees to pay off what you owe plus all the fees you've built up.

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 three major credit bureaus and, in turn, impact your credit score.1

So, are Payday Loans a Good Idea?

Not really. The problem with payday loans is that while the fees may seem low at first glance, they are actually much higher when you consider the annual percentage rate (APR) the lender is charging. Consider this example from the U.S. Federal Trade Commission (FTC): if you borrow $100 for two weeks from a payday lender and pay a $15 fee, the APR is 391%. That rate increases each time you roll the loan over.2

Smart Alternatives to High-Rate Payday Loans

There are a number of different approaches you can take if you cannot pay your monthly bills .

  • Talk to your creditors. Contact them and ask to set up a payment plan that lowers your monthly payments. At OneMain, we encourage customers who are having trouble making payments to contact us so we can work together to get them back on track.

  • Look into a personal loan from a credit union or other local financial institution. These lenders often offer short-term loans at much lower rates than payday lenders.

  • Consider borrowing from family or friends. Keep in mind, however, that borrowing from family and friends can put stress on your relationships if you don't pay the money back in a timely manner.

  • Explore a cash advance from your credit card. While the rates for cash advances are higher than for most secured personal loans, for example, they are still lower than the interest rates on payday loans.

If you're having financial problems, it's also helpful to talk with a non-profit credit counseling agency. They can help you set up a budget and build a plan to get out of debt.


1. Source:
2. Source: Federal Trade Commission, Articles, Payday Loans, “I Just Need Enough Cash to Tide Me Over Until Payday.”


*This article has been updated from its original posting in January, 2014

The information in this article is provided for general education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. It is not intended to be and does not constitute financial, legal or any other advice specific to you the user or anyone else. The companies and individuals (other than OneMain Financial’s sponsored partners) referred to in this message are not sponsors of, do not endorse, and are not otherwise affiliated with OneMain Financial.