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It's almost the end of the month and money is tight. Then you're hit with a new unplanned expense—maybe a car repair, an unexpected overdraft or medical expense that throws your carefully planned budget out of whack. You've seen ads for payday loans and think that might be just what you need to get by for the next week or so.
Using a payday loan to get you to your next paycheck is a short-term financial decision that may have long-term negative results, ranging from paying an excessive amount of interest on the loan to dealing with a payday lender looking to be repaid. Fortunately, you can avoid taking out a payday loan by employing a number of other strategies.
What Is a Payday Loan?
A payday loan is a short-term loan provided by lenders outside of the traditional banking space. These loans are typically $500 or less and have terms of two to four weeks, or until your next payday. While many states regulate payday loan terms, you can expect to pay $10 to $30 per every $100 borrowed—or 400% or more in interest based on the annual percentage rate (APR), according to the Consumer Federation of America.
Payday loan regulations vary by state, with some states even banning them entirely. Payday lenders don't usually require a credit check or proof that the borrower has the means to pay back the loan. These loans commonly are rolled over or reborrowed if the borrower can't pay the amount back as agreed—resulting in even higher borrowing costs.
Borrowers who seek out payday loans may be from underbanked communities or may have limited access to other financial tools that provide better financial options. According to the Consumer Financial Protection Bureau (CFPB), payday loan borrowers are concentrated among women, Black and Hispanic consumers, low-income consumers, those with a high school education or less, and consumers 40 to 61 years old. The CFPB notes that 60% of those who use alternative financing (specifically payday loans, title loans and pawn loans) report being turned down for mainstream financing or not approved for the amount needed.
Despite their easy access, payday loans can result in a cycle of costly debt for borrowers.
Alternatives to Payday Loans
If you need cash to help you cover expenses until your next paycheck, consider these alternatives to payday loans.
- Apply for a personal loan. Credit unions and other lenders may be willing to lend you the money you need, even if you have bad credit. If you don't belong to a credit union, look into local credit unions in your area and find out if you qualify (you must be a member of a credit union to apply for a loan there). Other lenders, including online loan providers Avant and Upstart, offer loans to those with fair or poor credit, often starting at $1,000 or more.
- Reach out to friends and family. If you need a smaller amount to get you to your next paycheck, consider asking a family member or close friend for a loan. Even if it's an uncomfortable conversation, this could be a good option, as long as you put the loan agreement in writing and stick to the terms you've agreed to. Because this option could potentially negatively impact your relationship, proceed with care and avoid agreeing to any repayment terms that you think you may be unable to fulfill.
- Research local resources. Contact a local nonprofit or organization that helps individuals with short-term financial concerns. If you're unable to afford groceries for the month, reach out to a local food pantry. You can call 311 to find out about local services or do an online search for resources in your area. If you think you may need longer-term help, look into general financial assistance programs.
- Talk to your job's human resources department. Your employer may provide short-term loans to employees. Larger organizations may have short-term financial resources available or guidance on how to connect with organizations within your city or town that may be able to help you.
- Explore early payday apps. These may be offered by your employer, an online bank or other companies. Early payday apps typically provide a portion of your pay before your payday or a service that allows you to take small advances on your future income. While not a long-term solution, early payday apps offer a lower-cost alternative to payday loans.
- Borrow from your credit card. If you have credit available on your credit card and know you'll be able to pay off the amount you need fairly quickly, you may consider a credit card cash advance. Before using this option, check to see what interest you'll pay on the advance, since many cards charge higher interest on cash advances than on regular purchases.
Before letting fear impact your decision, take a step back to review your options and do some research. In addition to the above options, this could include reaching out to see if there's a way to negotiate the terms of your unexpected bill or working out a payment plan. If you have some time to take action, consider selling items you no longer need, such as lightly worn clothing items, exercise gear or tools. Or pick up a side hustle to help tide you over. Staffing a one-time event, participating in a focus group, or offering services such as cleaning, cooking, online tutoring or pet sitting are all potential options.
How Does a Payday Loan Affect Your Credit?
Payday loan companies don't typically check your credit or report to the credit bureaus, so if you take out a payday loan and pay it back as agreed, you may see no change to your credit scores.
However, if you're unable to abide by the loan's terms and stop repaying your loan, the lender may turn over your account to a collection agency, and that account will likely appear on your credit report and have a negative impact on your credit scores.
How to Deal With Existing Payday Loan Debt
If possible, try to negotiate with your lender before allowing your account to become past due. If you're already past that point, speak with your lender to find out if there are any plans to help you get back on track. Many states require payday lenders to provide extended payment plans (EPPs). This agreement extends your loan repayment period and may lower the monthly amount due. Other options that could help you pay off your payday loan include a debt consolidation loan or debt management plan, which is a more in-depth debt payoff plan you can get through a certified credit counselor.
The Bottom Line
If you find yourself in financial distress, don't beat yourself up, but do spend time evaluating your overall financial picture before making a decision that could complicate your finances further. Fortunately, there are a number of actions that you can take before saying yes to a financial tool that may potentially harm your short-term and long-term finances.