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Stop! Don't Take Out a PayDay Loan — Consider These 5 Alternatives Instead

If you’re short on cash and need money fast to help you make it until your next paycheck arrives, you may be considering taking out a payday loan. However, payday loans are a dangerous form of credit, and you could end up owing far more than you originally borrowed. 

Here’s what you need to know about the drawbacks of payday loans, and what alternatives you can use when you’re in a bind. 

What are payday loans? 

A payday loan is a short-term, high-cost loan. They’re usually for relatively small amounts — $500 or less — and are meant to tide you over until your next payday.

The payment process is a bit different than regular loans. Rather than making monthly payments like you do with installment loans, payday loans are usually due in one lump sum once you receive your next paycheck. Loan terms are often quite short; they’re usually just two to four weeks in length. 

Why are payday loans so terrible? 

When you need money right away, a payday loan may sound appealing. You’ll get the cash you need to cover the cost of a car repair or to pay for groceries, and you’ll pay it back on your next payday. So what’s the problem? 

Payday loans are more complicated than you may think. You should avoid them for the following reasons: 

  • Payday loans have sky-high interest rates.  According to the Consumer Financial Protection Bureau, the fees charged on a payday loan equate to an APR of 400%. That means you’ll have to pay back far more than you originally borrowed, making it difficult to pay off the loan. 

  • They often have costly fees. In addition to the high APR, payday loans have expensive late fees, insufficient funds fees, or other hidden costs that can greatly increase the amount you owe.

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  • You have to give the lender electronic account access. When you take out a payday loan, the lender will require you to sign an ACH authorization form. That allows the lender to withdraw the amount due directly from your bank account on a set date, regardless of your ability to pay. If you don’t have enough money in your bank account at the time of withdraw, you’ll be hit with overdraft charges, too. 

  • Payday loans can cause a cycle of debt. Many people are unable to pay off their payday loans on the original due date. Instead, they roll over or renew the loan, paying a fee to extend the due date. Over time, you can end up owing hundreds more than you originally borrowed, making it hard to get out of the payday loan cycle. 

Other options

Now that you know why payday loans are so dangerous, make sure you exhaust all of your options so you can avoid them. If you need money quickly, consider these alternatives: 

1. Ask friends or family for help

It may be embarrassing to ask for help, but asking your friends or family members for a small loan is a much better choice than turning to a pricey payday loan.

If it makes you feel better, sit down with your loved ones and come up with a detailed payment plan. Set a fixed repayment date, and you can even pay back the loan with interest. 

2. Request a payment plan

Some creditors, like doctor's offices or utility companies, will allow you to set up a payment plan if you can’t afford to pay the balance in full. You may be able to spread out your payments over several weeks or even months, or you may qualify for a due-date extension.

Just call the company’s customer service line and share your situation, explaining when you expect to be able to pay off the full amount. 

3. Talk to your employer about a paycheck advance

In some cases, you may be able to qualify for an advance on your paycheck.

There’s no interest to repay on a paycheck advance; it simply means you’ll get access to your usual pay ahead of schedule. Talk to your employer’s human resources or payroll department to find out if this is an option. 

4. Use a credit card

If you have good credit, you may be able to use a low-interest credit card to cover the cost of necessary expenses until your next pay day. However, double-check the card’s interest rate. Many credit cards have high APRs, and you’ll pay back more than you would with another option, like a personal loan. 

5. Consider a personal loan

If you have good to excellent credit and a stable income, a cheaper option is to take out a personal loan.

Personal loan lenders offer competitive interest rates that are far lower than you’d get with a payday loan or even a credit card. You can often stretch repayment terms over several years to enjoy a lower monthly payment that you'll be more confident you can pay back. 

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Your next move

Many personal loan lenders, such as Citizens Bank, allow you to apply online in as little as five minutes. Plus, the company offers rapid approvals, so you can handle any emergencies that come up with confidence.

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