If your car breaks down a week before payday and will cost $2,000 to fix, what are your options? For many Americans, a quick payday loan may seem like their only option. It appears simple: write a post-dated check for the loan, add the lender’s fee and you have a two-week loan to pay for the repairs. But what happens when you can’t pay it back at the end of the two weeks? Amber Mostyn breaks down what you need to know before taking out a payday loan:
- The loans are ONLY intended for one-off expenses: Payday loans were originally created to help borrowers pay for a one-time unexpected expense in between pay periods and are typically for $500 or less. That’s why the cost of loan is so high because it was assumed that the borrower would have the money come their next payday. However, many borrowers quickly find themselves underwater when they start relying on these loans to pay off normal, week-to-week expenses.
- 391% APR: The average annual percentage rate (APR), or the total annual amount of interest for credit cards ranges from 12 to 30 percent. For payday loans, that number can skyrocket. In fact, the average payday loan carries a 391% APR. To put it simply, if you take out a $200 payday loan, it will cost you $15 on top of that. That’s $1.07 per day! But what if you can’t pay back the loan in the two-week period? The cost of the loan will quickly become greater than the loan itself.
- Loan fees can often supersede the original loan: Did you know that the average payday loan is extended eight times? By the time the loan is actually paid off, the loan fee ends up being significantly more than the original loan amount. And since around 80% of payday loans are followed by another loan, it’s an easy cycle to get caught up in.
- There are other small-money loan options: There are increasingly more options for small, emergency loans: credit unions, emergency loan funds, credit cards or small personal bank loans. It’s best to exhaust all other options before taking out a payday loan. A quick online search will give you cheaper options as well as financial literacy information.
- Payday loans don’t require a credit check: All you need to secure a payday loan is a checking account and a steady income. Borrowers typically don’t have access to credit cards and don’t have to worry about having a good credit score.