Payday loans advance borrowers a small amount of cash, typically between $50 and $1000, with the agreement that the loan will be paid back in full when the borrower receives their next paycheck. You may also find them going by other names like short-term loans, payday advances, salary loans, payroll loans, small dollar loans and cash advance loans. Payday loans are intended to provide quick financial relief when you need cash fast and they include specific guidelines and harsh penalties if they're not paid back on time.
Payday loan pros and cons
There are many reasons you might apply for a payday loan, including car repairs, job loss and medical emergencies. While applying for these loans is quick and easy, there are some important considerations.
Payday loans are notorious for their high interest rates and fees. Fees typically range from $10 to $30 per $100 borrowed.
Take this scenario for example: If you pay $30 for every $100 borrowed on a $300 loan, you’re left owing a total of $390, which is the equivalent of an APR of 261 percent for a two-week loan. For comparison, the average personal loan interest rates range from 5 percent to 36 percent. It’s not uncommon for the APR on a payday loan to be as high as 400 percent.
- Quick cash
- Easy application process
- High approval rate
- Available for people with bad credit
- High APR rates
- Severe penalty fees
- Must complete payback in a short period
- Debt from nonpayment impacts credits
Are payday loans worth it?
Payday loans may not provide the best solution to financial emergencies given the associated cost and higher risk for repeat use which can easily lead borrowers into a cycle of debt that’s very hard to recover from. There are payday loan alternatives that may be worth checking out before proceeding with a payday loan.
Sometimes a payday loan may be the only option available to borrowers without other financial means, and they can be attractive because they’re faster and easier to obtain than traditional loans. If you’re in a situation where you feel a payday loan is necessary, do your research. Depending on where you live, some lenders may offer extended repayment plans affording more time without the steep penalty fees. Be sure you understand your state’s payday loan regulations, and look for a lender with a good record of customer satisfaction.