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Millions of Americans struggle to make ends meet. According to a survey from First National Bank of Omaha released earlier this year, 49% of U.S. adults expected to live paycheck to paycheck in 2020, and no doubt the pandemic has only made things worse. In July, Pew reported that nearly 12 million Americans rely on payday loans each year.
In a pinch, a payday loan can seem like an easy fix if you're strapped for cash. You usually just need proof of income and an ID, and you can get a small loan on the spot. But read the fine print and you'll see these loans are loaded with hidden fees and high interest rates, since they are unfortunately marketed to people who are in a tough spot and have few options for getting an affordable loan from a reputable lender.
Payday loans are considered a form of predatory lending by the ACLU, and many states have legislation pending to impose interest rate caps and other regulations on how much lenders can charge. Most recently, Nebraska passed a law lowering the interest rate cap from 400% to 36%. While 36% is more expensive than the average credit card APR, it's a vast improvement for many borrowers who are struggling to repay these loans.
Often, people will visit physical locations to apply for a payday loan in-person. To complete an application, you'll need to have recent paystubs that prove your income. Your payday loan may be unsecured, or the lender may use your income as collateral, granting them the right to garnish your wages if you fail to pay them back.
If you have a credit history, the lender will pull your credit report, resulting in a hard pull, and make a decision.
Once you get your money (usually same day), you typically have less than 30 days to pay back the loan in full, plus any finance charges. That's markedly different from a traditional installment loan, where you pay for the debt over a few months or even years.
While payday loans may be a quick way to get the money you need, the interest rates are exorbitantly high. Currently, lenders are not required by law to verify that you are capable of paying back these sky-high finance charges and fees, let alone the money you borrowed.
And the consequences if you can't pay it back are severe: The fees and charges will vary depending on how much you borrow and where you live. In some states without regulations, you might pay more than 500% in interest for just a short-term loan of a few hundred dollars, which grows over time when you can't repay the balance.
Worse, when payday loans are secured by your paycheck, you may be opening up access to give lenders permission to garnish your wages, making it nearly impossible to get ahead.
If you can, steer clear of payday loans and consider lower-interest options instead. This may be borrowing money from a family member and paying them back, taking out a personal loan or trying to negotiate a payment plan with your debtor.
If none of these options are viable, you could consider using your credit card, whether by simply swiping it or taking out a cash advance (which usually has a fee of about 5% or more). Though credit cards have some of the highest interest rates, it's still less expensive than what you could pay if you take out a payday loan you can't afford to pay off.
If you can't pay off your credit card balance in full, you can still protect your credit score by making the minimum payments until you're in a better financial situation.