Payday Loans and the Alternatives
A payday loan is easy to get and hard to leave. If you need cash before your next check, there is usually a cheaper option, and it is worth ten minutes to find it before you sign.
How a Payday Loan Works
You borrow a small amount, usually a few hundred dollars, and agree to repay all of it plus a fee on your next payday. The lender takes a post-dated check or permission to debit your bank account, so repayment happens whether or not the rest of your bills are covered.
The fee is quoted per $100 borrowed, which makes it sound small. The Consumer Financial Protection Bureau's example is a $15 fee per $100 on a two-week loan. Stated as a yearly rate, that is close to 400 percent. A credit card is a fraction of that.
The full amount is due at once, two weeks later, out of a paycheck that already had to cover everything else. Many borrowers cannot do that, so they pay the fee and take the loan again. The CFPB found that most payday loans are re-borrowed within two weeks. Each rollover is a new fee, and none of it reduces what you owe.
Better Options, Roughly Cheapest First
- Ask the bill for more time. If the cash is for a utility, rent, medical or phone bill, call the company first. Payment plans and hardship programs are common and rarely advertised.
- A small-dollar loan from a credit union. Many credit unions make small loans repaid in installments over several months instead of in one lump. Federal credit unions can offer Payday Alternative Loans under NCUA rules, which cap the interest at 28% and the application fee at $20. Other credit unions have their own versions. Ask before you assume you will not qualify.
- A paycheck advance from your employer. Some employers will advance wages you have already earned at no cost. Ask HR or payroll.
- Local help. Dialing 211 connects you to local programs for rent, utilities, food and medical bills. Churches and community groups often run emergency funds as well.
- A credit card you already have. Expensive, especially a cash advance, but usually far cheaper than a payday loan, and you are not forced to repay in two weeks.
- Family or friends. Put the amount and the repayment date in writing, even something simple. It protects the relationship.
Before you take a payday loan, ask KCCU what it can do for a short-term need. A credit union installment loan usually costs far less than a payday loan, and asking is free. See KCCU loans →
Earned-wage and cash advance apps often charge a monthly subscription, an instant-transfer fee, or ask for a "tip". On a small advance those charges can add up to a cost close to a payday loan's. Add up what you would actually pay before you use one.
If You Already Have a Payday Loan
- Do not roll it over if you can avoid it. Every rollover is another fee on the same balance.
- Ask for an extended payment plan. Many states require lenders to offer one, usually only if you ask before the due date. It lets you repay in installments without new fees.
- Refinance it with a credit union. A small-dollar loan can pay off the payday loan and give you months to repay instead of weeks.
- You can stop automatic withdrawals. You have the right to revoke permission for a lender to debit your account. Tell the lender in writing and tell your bank. You still owe the debt, but you decide when the money moves, which can save you overdraft fees.
- Get free counseling. A nonprofit credit counselor can look at the whole picture with you. Look for one affiliated with the NFCC.
Most payday loans cover a gap of a few hundred dollars. Building even a small emergency fund, a little from each check into a separate savings account, is what stops the next gap from turning into a loan.
Know Your Protections
Payday lending is regulated by states, and the rules vary a lot. Some states ban payday loans or cap their cost, and others allow them with few limits. Your state's attorney general or financial regulator lists the rules where you live. Active-duty service members and their families are covered by the Military Lending Act, which caps the cost of most consumer loans at 36%.
If a lender threatens you with arrest, contacts your employer about the debt, or keeps debiting your account after you revoked permission, you can file a complaint with the CFPB at consumerfinance.gov.