Why You Should Avoid Payday Loans (and What to Do Instead)

If you’ve ever needed cash ASAP but your next paycheck is still days–or sometimes weeks–away, then you know the feeling of panic that comes with wondering how you’ll make ends meet. Payday loans are often marketed as lifelines during these stressful moments, allowing people to borrow as little as $50.

4 Reasons to avoid payday loans

Payday loans can get cash into your hands quickly and be especially tempting for those who don’t have the credit to qualify for other borrowing options (since payday loans usually don’t do credit checks). However, payday loans are intentionally structured to keep borrowers trapped in a cycle of debt and can quickly take your financial woes from bad to worse.

Astronomical interest rates

The average interest rate for a personal loan is around 12% and 23% for credit cards. The APR for payday loans? Try 400%.

Unlike credit cards, payday loans don’t have a grace period that exempts borrowers from paying interest if they repay what they borrow before the next billing cycle. If you take out a payday loan, you’re going to be charged an upfront finance fee no matter what. This charge is usually between $15 to $30 per hundred dollars borrowed, equivalent to a 391% APR, which is why payday loans are one of the most expensive methods of borrowing money.

So. Many. Fees.

In addition to the sky-high interest rates, payday loans carry all sorts of other potential costs like late fees or returned check fees if the check payable doesn’t clear. To make matters worse, many payday loans are set up to withdraw money directly from the borrower’s bank accounts so borrowers can also be hit with non-sufficient funds (NSF) charges by their bank on top of the fees from the payday lender.

Short repayment periods

The real trouble with payday loans is when the borrower fails to repay the full amount within the first payment cycle usually within two weeks. Technically, you can extend your due date if you can’t repay the loan within this timeframe—but it’s going to cost you big time.

Rollovers, as these are known, incur an additional fee (usually the same amount as the initial finance charge) that’s added to the total balance every time the loan is extended. But since finance charges are based on a percentage of the total balance, each rollover is going to cost more money making the total balance even bigger and more difficult to pay off.

Payday loan alternatives

Payday loans aren’t meant to help people save money or to be easy to pay off. They cost Americans an estimated $3 billion each year, often those who are most financially vulnerable. Instead of turning to expensive loans, consider these alternatives instead:

• Contact your lender before falling behind on a payment. They’ll likely be willing to work with you, waiving late fees or extending your due date. You may also be able to arrange a custom payment plan depending on the lender.
• Open a low-interest credit card. Payday loans do absolutely nothing for your credit. Opening a low or no-interest credit card can boost your score and give you months to pay off a balance at a significantly lower rate than a payday loan.
• Talk to a credit counselor. If you often find yourself struggling to keep up with payments, a credit counselor can provide a free debt analysis to give you insight and advice on how to improve your finances. If your situation is more dire, they can enroll you in a debt management program (DMP), a unique debt relief method where debts may be reduced and penalties forgiven.

If you need financial help and aren’t sure how to get started, contact us to get personalized assistance from a KOFE financial coach today!