Table of Contents
- The average interest rate on a payday loan is about 400% APR
- Some states have laws capping payday loan interest rates at 36% APR, and payday loans are illegal in 18 states and Washington D.C.
- Payday loan interest rates are presented as fees — this tricks borrowers into agreeing to pay these high APRs
- About 80% of payday loan borrowers can’t repay their loan on the due date, and have to roll it over into a new loan
- These rollover loans tack on even more fees
Stuck in payday debt?
DebtHammer may be able to help.
Payday loan “interest rates” are presented as fees
How payday loan interest rates are calculated
How to calculate the APR on a payday loan
Pro tip: The Consumer Financial Protection Bureau offers a helpful list of payday loan costs and fees. Check it out at cfbp.gov.
Payday loans are illegal in some states
READ MORE: Payday loan state regulations
How payday loans work
Pro tip: You may be asked to provide a post-dated check or electronic bank account information so the lender can automatically debit your account on the loan’s due date.
READ MORE: Payday loan requirements
What’s the difference between a payday loan and a tribal payday loan
The problem with payday lenders
The dangers of predatory lending
Learn more about the dangers of payday loans at responsiblelending.org.
Payday lenders don’t usually have a minimum credit score requirement
As long as you meet the basic criteria (are 18 or older, have a steady job and a checking account) most payday lenders will not check your credit report or credit score. If you don’t have a bank account, it’s possible that some payday lenders will run a credit check in order to assess your creditworthiness.
What happens if you default on a payday loan
Payday loan extended payment plans
Pro tip: In states that don’t require EPPs, look for lenders that belong to the Community Financial Services Association of America if you have to take out a payday loan. Members are required to provide EPPs.
You may have to ask your lender if they offer an EPP, and you will have to apply a day before the loan payment is due. The lender may not tell you if you don’t ask.
An EPP is not the same as a rollover
Many lenders will suggest a loan rollover. This is not the same thing as an EPP. An EPP gives you an extended period to pay at a reduced interest rate that will not cause your loan balance to explode.
A rollover is a new payday loan on top of your old one, often with a hefty fee attached. An EPP will make your situation better, a rollover will make it worse.
READ MORE: Payday loan refinancing
Payday loans and the Military Lending Act
The Military Lending Act (MLA) caps interest rates on loans to active duty service members (including active Guard or active Reserve duty) at 36% APR. The APR includes interest and any other fees.
Pro tip: This is why you may see notations on lending websites stating that loans are not available to military service members and veterans.
Most payday lenders will not lend to service members because their rates are far above this level. If you are a service member and you think a lender may have violated your rights under the MLA, contact your nearest Judge Advocate General legal assistance office.
Payday loan alternatives
Payday loans may not be the only choice if you need money. You may also be able to borrow to pay off a payday loan and pay off the new loan on more reasonable terms.
Consider these options.
- Cash advance apps like Brigit, Dave, and FloatMe allow you to draw cash advances to get you through to the next payday. The advance may be free, though you will pay a small monthly fee to use the app.
- Advances are only available to existing app users, so they won’t bail you out of a current problem.
- A personal loan will offer a better interest rate and a longer term than a payday loan, making them much easier to pay off. Many personal loans require good credit, but some lenders, like Upgrade, Upstart, and LendingPoint, specialize in serving borrowers with impaired credit.
- Balance transfer credit cards offer an extended zero-interest promotional period. You transfer your loan balance onto the card, and if you pay it off within that period you can pay only the principal, without accumulating more interest.
- Most balance transfer cards require good credit, so they may not be an option for most payday loan borrowers.
- Payday Alternative Loans are offered by credit unions and are designed to help customers avoid or escape the payday loan trap. These are typically short-term loans that take the place of a payday loans with much lower interest and fees. Ask your credit union if they offer this service.
- Debt Management Plans (DMPs) are offered by non-profit credit counseling services. Most offer a free initial consultation to assess your situation. The counselor may recommend a debt management plan. If you sign up for a plan, you will make one monthly payment to the counseling agency. They will pay your creditors and negotiate for better terms. Debt management plans typically reduce your interest rates to 8% to 10% APR. These plans require discipline and many people don’t complete them, but they can be an effective way to get out of debt. Be sure to check the agency’s reputation and reviews to see if they are legit!
Feeling trapped? Here are eight ways to get out of a bad payday loan:
If you’re stuck in the payday loan trap
The payday loan trap is a vicious cycle. You feel like you’re working for the lenders instead of for yourself, and it may seem like there’s no way out. That’s what the lenders want you to feel: like there’s no option but to keep paying them.
You do have choices. If none of the options above works for you, or if you’re looking for something different, DebtHammer’s proven program may work for you, as it has worked for thousands of others.
We have easy-to-understand plans for our services with no hidden fees, obligations or gotchas. Schedule a free consultation today!
The bottom line
If you have bad credit and are desperate for cash, a payday loan may seem like the answer to your problems. In fact, it will almost always make your problems worse. Payday loan interest rates and fees are designed to trap you in a cycle of debt that will end with you paying far more than you borrowed. Avoid payday loans — even if it seems like there’s no other option.
If you’re already caught in the payday loan trap, don’t get discouraged. You’re in a bad situation, but there are ways out. Start with the options above and don’t give up!
A payday loan is a short term loan. You pay the entire amount, plus any fees and interest, in a single payment at the end of the loan term, usually on your next payday. An installment loan is paid back in several installments over a period of several months or even years.
The Truth in Lending Act (TILA) is a federal law that applies to all credit and lending activities in the US. It does not control the terms that lenders can offer, but it requires full disclosure of loan terms and costs. Lenders have to reveal these costs on the loan application.
The TILA is enforced by the Federal Trade Commission and the Consumer Financial Protection Bureau.
A payday loan is unsecured. There is no collateral for the loan. If you can’t pay, your account will be sold to a collection agency. The lender or collector may sue you.
A title loan is secured by the title to a vehicle. If you fail to pay, the lender can repossess the vehicle and sell it.