When the bills pile up, it’s natural to look for the quickest way out of your situation. But sometimes what seems like the perfect solution can actually lead to bigger problems. This is the case with payday loans, which promise quick and easy cash while hiding an alarming cost. But do not worry. There are other ways to get the money you need, and if you already have payday loan debt, it is possible to get out of this situation.
What’s so bad about payday loans?
A payday loan is a short-term loan, usually $500 or less. It is much faster to obtain one of these types of loans than other more traditional loans from a bank. Usually all you have to do is provide ID and proof of income, then write a post-dated check or allow the lender to withdraw the funds from your account on your next payday. No collateral is required and you can be out with your money in minutes.
This sounds great in theory, but payday loans usually carry astronomical interest rates. A typical credit card may have a annual percentage rate of charge (APR) 15% to 30%, depending on cardholder’s credit. A payday loan can easily have an APR of 400% or more.
Those who are unable to repay what they owe often end up extending their payday loan, which only adds more interest, and the cycle continues month after month. Over time, it becomes increasingly difficult to keep up with payments as interest charges escalate.
Let’s say you take out a $100 payday loan with an APR of 400% due in two weeks. If you are unable to repay it, the payday lender will now charge you interest on your initial $100, plus the $15.34 interest owed on the first loan. If you cannot repay the loan after one month, you will owe $165. After three months, it will cost you $232. And after a year, you’ll owe $500, assuming you continue to extend the loan without paying anything back.
Payday loans are so dangerous that some states have banned them outright while others have limited the interest rates and fees that payday lenders are allowed to charge their customers. But many states still allow these outrageous charges to continue. Fortunately, payday loans aren’t the only way to get the money you need.
Payday loan alternatives to consider
Avoiding payday loans is possible, but your approach will depend on several factors, including your credit and when you need the money. For non-emergency expenses, the best strategy is often to save up little by little for your purchases. And if you don’t have emergency fund yet, you should build one so you don’t have to borrow money for unexpected expenses.
In some cases, you may be able to work out a payment plan rather than paying a large bill all at once. Many hospitals allow you to do this for medical debts and you may be able to do the same for other bills.
Personal loans are another option, and they’re also a great choice for those who already have payday loan debt. This is another type of loan that doesn’t have collateral, and it’s possible to get one even if your credit isn’t great. The interest rates on these loans are higher than what you will see with a mortgage or car loan, but they are much more affordable than payday loans. You can also borrow a lot more if you need to, and many lenders offer you longer repayment terms. Plus, many lenders can get you the money you need in a day or two.
There are other kinds of distressed loans also available, for things like medical care or emergency home repairs that can help you in certain situations.
Finally, you can consult local charities if you need help with essentials. You may be able to get food, clothing, and other essentials at little or no cost.
You can usually find better options than a payday loan. But if you choose to take one out anyway, make sure you understand its costs and be sure you can pay it back on time. Otherwise, you will only postpone your financial problems.
Alert: The highest cash back card we’ve seen now has 0% introductory APR through 2023
If you use the wrong credit or debit card, it could cost you dearly. Our expert likes this first choicewhich offers an introductory APR of 0% until 2023, an insane repayment rate of up to 5%, and all with no annual fee.
In fact, this map is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.