Payday loan is a high-cost, short-term loan for a small amount — typically $500 or less — that’s meant to be repaid with the borrower’s next paycheck. Payday loans require only an income and bank account and are often made to people who have bad or nonexistent credit.
Financial experts caution against payday loans — particularly if there’s any chance the borrower can’t repay the loan immediately — and recommend alternative lending sources instead.
How do payday loans work?
A payday lender will confirm your income and checking account information and deliver cash in as little as 15 minutes at a store or, if the transaction is done online, as early as the same day.
In exchange, the lender will ask for a signed check or permission to electronically withdraw money from your bank account. The loan is due immediately after your next payday, typically in two weeks, but sometimes in one month.
If the loan is issued at a store, the lender will make an appointment for you to return when the loan is due. If you don’t show up, the lender will run the check or make the withdrawal for the loan amount plus interest. Online lenders use an electronic withdrawal.
An installment loan may be a more affordable way to borrow money. These loans let you borrow the money all at once, then pay it back in fixed monthly payments over a period of months or years, instead of weeks. You won’t need to put up collateral, and loan amounts tend to be higher, while interest rates are usually lower. Lenders typically require a credit check to apply, but you can find installment loans for bad credit.
Payday Loan Alternatives
Surveys suggest that 12 million American consumers get payday loans every year, despite the ample evidence that they send most borrowers into deeper debt.
There are other ways to find debt relief without resorting to payday loans. Community agencies, churches and private charities are the easiest places to try.
Paycheck advance: Many companies offer employees a chance to get money they earned before their paycheck is due. For example, if an employee has worked seven days and the next scheduled paycheck isn’t due for another five days, the company can pay the employee for the seven days. It is not a loan. It will be deducted when the next payday arrives.
Borrow from family or friends: Borrowing money from friends or family is a fast and often the least expensive way to dig yourself out of trouble. You would expect to pay much lower interest rate and have far more generous timeframe than two weeks to pay off a loan, but make sure this is a business deal that makes both sides happy. Draw up an agreement that makes the terms of the loan clear. And stick to it.
Credit Counseling: Nonprofit credit counseling agencies like InCharge Debt Solutions offer free advice on how to set up an affordable monthly budget and chip away at debt. InCharge credit counselors can direct you to places in your area that offer assistance with food, clothing, rent and utility bills to help people get through a financial crisis.
Debt management plans: Nonprofit credit counseling agencies like InCharge also offer a service, at a monthly fee, to reduce credit card debt through debt management plans. The creditor offers a lower interest rate to the agency, and you can agree whether to accept it. The agency pays the creditors, and you make one monthly payment to the agency, which frees up money so you can pay your bills and reduce the debt. The plan pays off the debt in 3-5 years.
Debt Settlement: If trying to keep pace with unsecured debt (credit cards, hospital bills, personal loans) is the reason you’re always out of money, you could choose debt settlement as a debt-relief option. Debt settlement means negotiating to pay less than what you owe, but it comes with a major stain on your credit report and heavy price on your credit score.
Local charities and churches: If you have hit a bump in the road, there are a surprising number of charities and churches willing to lend assistance at no cost. Organizations like United Way, Salvation Army and church-sponsored ministries like the St. Vincent de Paul Society often step in when all you need is a few hundred dollars to get through a tough stretch.
Community banks and credit unions: The regulations allow local banks and credit unions to make smaller loans on easier repayment terms than the large regional or national banks do. Call or visit to compare interest rates, which could be as low as 10%-12% as compared to 400%-500% rates on payday loans.
Peer-to-Peer Lending: If you’re still having problem finding a source of money, go online and check the peer-to-peer lending sites. The interest rates could be close to 35% than the 6% rate those with great credit receive, but 35% is still a lot better than the 391% from a payday lender.