Quick Guide to Payday Loans

-- Emily Heaslip
Payday Lenders

In the wake of COVID-19 shutdowns, many Americans are struggling to make ends meet. Federal resources have done little to help families and individuals pay their rent and other expenses following skyrocketing unemployment. As a result, many people are turning to other sources for financial assistance.

If you’re looking for a short-term quick infusion of cash, a payday loan can sound appealing. However, experts warn, payday loans are rarely a good option. Payday lenders are often predatory; so much so that some states have banned payday loans altogether. Here’s what you need to know about payday loans before you get involved.

What is a payday loan?

Payday loans are high-cost, short-term loans for around $300 that are meant to be repaid with your next paycheck. They’re offered through payday lenders like MoneyKey, Check Into Cash, and Ace Cash Express that operate out of storefronts and online. To qualify, you need to have income and a bank account – that’s it. Because of these low requirements, payday loans are appealing to those with bad or nonexistent credit.

When you ask for a payday loan, the process takes as little as 15 minutes to complete. The lender will confirm your income and checking account information, and give you cash on the spot or an electronic transfer by the following morning. In exchange, you must give the lender a signed check or permission to withdraw money electronically from your bank account. These short-term payday loans are due immediately following your next payday: two weeks to a month from the day the loan is issued.

To repay the loan, the lender will schedule an appointment for you to come back to the storefront and repay when the loan is due. “If you don’t show up, the lender will run the check or withdrawal for the loan amount plus interest. Online lenders will initiate an electronic withdrawal,” describes NerdWallet.

The danger of payday loans

Payday loans may seem straightforward, but they rarely are. “Payday loans come with a finance charge, which is typically based on your loan amount. Because payday loans have such short repayment terms, these costs translate to a steep APR [annual percentage rate]. According to the Consumer Federation of America, payday loan APRs are usually 400% or more,” reports Experian.

High interest rates are a given with a payday loan. Pretend you need a loan of $100 for a two-week payday loan. The lender charges you a $15 fee for every $100 borrowed – a 15% interest rate. Since you have to repay the loan in two weeks, the 15% charge equates to an APR of almost 400%. On a two-week loan, the daily interest cost is $1.07. Project that expense out over the full year: borrowing $100 would cost you $391.

Furthermore, it’s common for people who take a payday loan to get locked into a vicious cycle. “The problem is that the borrower usually needs to take another payday loan to pay off the first one. The whole reason for taking the first payday loan was that they didn’t have the money for an emergency need. Since regular earnings will be consumed by regular expenses, they won’t be any better off in two weeks,” says one expert.

What to do if you already have a payday loan

Individuals stuck in a payday loan may start to feel desperate as the expenses pile up. Can you go to jail for not paying back a payday loan? Can payday loans sue you? Is there a way to get out of payday loans legally?

If you’re in a situation where you can’t repay the loan, a payday lender will continue to withdraw money from your account, sometimes taking smaller repayment amounts to increase the chance that the payment will go through. Lenders may also try to negotiate a settlement with you for the money owed. It’s also possible that a lender will outsource the loan to a debt collector – who is able to file a civil lawsuit.

“Failure to repay a loan is not a criminal offense. In fact, it’s illegal for a lender to threaten a borrower with arrest or jail. Nonetheless, some payday lenders have succeeded in using bad-check laws to file criminal complaints against borrowers, with judges erroneously rubber-stamping the complaints,” explained NerdWallet.

If you’re looking to get out of payday loans legally, there are a few options. Look into debt consolidation loans, peer-to-peer loans, or, as a last resort, a debt management plan. Speak to a lawyer or a financial expert to figure out what your options are – but above all, don’t sacrifice food on your table to pay for a payday loan.