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A payday loan is a type of short-term, high-interest personal loan that becomes due when you get your next paycheck. Payday loans may look appealing in a cash crunch, particularly for people with low credit scores. But the fees and interest are exorbitant, leading many borrowers to become trapped in a debt cycle where they take out loan after loan.
In this article, we’ll explain how payday loans work and why they’re so much riskier than other forms of consumer loans. We’ll cover the true cost of payday loans in terms of interest rates and finance charges, as well as what happens when you can’t repay the loan. Finally, we’ll explore some alternatives if you need to borrow money before your next payday.
What Is a Payday Loan?
A payday loan is a small-dollar loan, often for $500 or less, that typically becomes due in two to four weeks. The due date often corresponds with the borrower’s next payday or when they receive another source of income, like a Social Security, disability or pension check. Payday loans are sometimes referred to as cash advance loans or check advance loans. Because they don’t require collateral, payday loans are a type of unsecured loan.
Though payday loans are frequently advertised as a resource for borrowers facing an emergency or a one-time unexpected expense, that’s not how most borrowers use these high-cost loans. A study by The Pew Charitable Trusts found that 69% of borrowers used payday loans for regular bills and recurring expenses.
Payday loan services are available both online and through storefront payday lenders. The rules for payday loans depend on your state laws. Many states limit the interest rates or the maximum loan amount or the loan term. A handful of states ban payday loans altogether.
In recent years, though, many states have cracked down on high-interest payday loans. Not surprisingly, payday lenders have fled states that have imposed interest caps. The Pew Charitable Trusts reports…
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