When you’re low on cash between paychecks or have an unexpected financial emergency, a payday loan can be a tempting option to help you make ends meet or access cash quickly. However, these short-term loans, which are usually due on the day of your next payday, are extremely risky. They come with very high interest rates and other fees. The payday loan interest rates in the United States ranges from 154% to 664%.

Equally troubling, payday loans are often marketed to those who can least afford them, i.e. people who earn less than $40,000 a year. Although this type of loan is advertised as a short-term loan, payday loans can create a cycle of debt that is difficult to break free from.

What is a personal loan?

A payday loan is usually a short-term loan, lasting two to four weeks, that does not require collateral to be obtained. These loans are generally supposed to be repaid in one installment with your next paycheck when you receive Social Security income or a pension payment.

In most cases, payday loans are granted for relatively small amounts, often $500 or less, with the average borrower getting a payday loan of around $375. In some cases, payday loans can be made for larger amounts.

To obtain a payday loan, borrowers are asked to write a personal check for the amount of debt plus finance charges. If the loan is not repaid on time, the lender will deposit the check to recover their funds. Some lenders may request authorization to electronically deduct the funds from your bank account instead of requiring you to provide a personal check.

Payday loans generally do not involve credit checks, and your ability to repay debt while continuing to pay your daily expenses is generally not considered part of the application process.

Who usually takes out a personal loan?

Payday loans are most often sought out by those with ongoing cash flow issues, as opposed to borrowers who find themselves facing a financial emergency. A payday loan study found that 69 percent of borrowers first used a payday loan to cover recurring expenses such as utility bills, rent, mortgages, student loan payments or credit card bills. Only 16% of borrowers use payday loans for unexpected expenses.

These loans are also widely used by people living in neighborhoods and communities that are underserved by traditional banks or who do not have a bank account with a major financial institution. Payday lenders operate stores in 32 states, although a handful of states recently passed reforms requiring payday lenders to switch from a model in which borrowers must repay the loan in full with their next paycheck. pays to a fairer and less risky installment repayment structure.

What are the risks of personal loans?

Due to the many risks associated with payday loans, they are often viewed as predatory.

For starters, payday loans often come with astronomical interest rates. Those who take out such loans have to pay between $10 and $30 for every $100 borrowed. A typical payday loan with a two-week repayment term and a fee of $15 per $100 equates to an APR of nearly 400%.

Many payday lenders also offer rollovers or renewals, which allow you to simply pay the cost of borrowing the money on the loan’s due date and extend the balance owing for a longer period. It can be a slippery slope that has borrowers quickly getting in over their heads with fees and interest piling up. According to recent data from Pew Charitable Trusts, the average borrower finds themselves in debt for five months to fully pay off what was supposed to be a one-time payday loan. In the process, borrowers pay hundreds of dollars more in fees than originally advertised for the loan.

Are payday loans really worth it?

With their high interest rates and fees, a payday loan is rarely a good idea. The fees alone cost Americans $4 billion a year. Because the costs associated with these loans are so high, borrowers often struggle to repay them and take on more debt, so it’s a good idea to carefully consider your options before taking out a payday loan.

However, if you are in dire need or need cash quickly and are confident you can repay the loan with your next paycheck, a payday loan may be a good idea. These loans may also be worth considering if you have no other financial options or if you have no credit and would not qualify for a traditional loan.

Alternatives to payday loans

Before taking on the significant financial risks associated with a payday loan, consider other alternatives that may be less expensive. Some of the options to consider include:

• Borrowing money from family or friends: Payday loans should be a last resort. If you have family or friends willing to help you, it may be better to borrow money from your relatives than from a predatory lender.
• Home Equity Loan: Tapping into the equity in your home will give you a much more competitive interest rate than a payday loan. Home equity loans are a popular way to access cash to consolidate debt or pay for other large or unexpected expenses. However, to access the equity in your home, you will need to meet certain requirements, including having a good credit score, a stable income, and a debt-to-equity ratio of 43% or less.
• Payday advance : Some employers may offer the possibility of taking a salary advance. This implies that the employer grants you a short-term loan which you will repay on your future wages. Typically, the employer sets guidelines for how and when the money is to be repaid.
• Personal loan: For those with good credit, a personal loan can be a safer and more cost-effective borrowing option. Plus, if you need money fast, some online lenders can provide personal loan funds in as little as a day or two.
• Sell ​​unwanted items: There are various online platforms that allow you to turn all kinds of unwanted items into cash quickly. Some of the better known options include eBay, Facebook Marketplace, Craigslist and OfferUp. If it’s unwanted or used clothes that you want to convert to cash, there are also online resale platforms that specialize in this niche, including ThredUp, Poshmark, and TheRealReal. Many of these marketplaces deposit proceeds from sales directly into your bank account, while others, like OfferUp, allow you to sell locally and receive money directly from buyers.
• Lateral stampede: Thanks to the proliferation of apps and websites like Thumbtack, TaskRabbit, Rover, Uber and Lyft, it’s possible to do a few odd jobs in your spare time to quickly build up a side stream of income. TaskRabbit, for example, allows tasks to do everything from assembling furniture for extra cash to home delivery, gardening, and mounting TVs. Rover is a pet sitting and walking network where animal lovers can offer services.

At the end of the line

With high interest rates and tight repayment terms, payday loans are rarely the best choice when you need cash. Often, these types of loans trap borrowers in an inescapable cycle of debt.

Before resorting to a payday loan, consider the many alternatives. Borrowing money from family or friends, opening a home loan, or taking out a personal loan are far less risky options. And if you’re not in a rush for the money, there are even more options, including selling items you no longer want or taking on a side job to earn the extra cash you need.