What Is a Payday Loan, and Should I Get One?

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A payday loan is a type of cash advance loan. You borrow money and then pay the lender back on your next payday, hence the name payday loan. But the lender can charge exorbitant payday loan interest rates, sometimes up to 400%. Many financial experts consider payday loan lenders to be predatory, and getting a payday loan can keep you in a cycle of debt.

Payday loans can help with an emergency, but they can also create a heavy financial burden on the borrower. That’s why you should consider other ways to quickly borrow money if you need it.

How do payday loans work?

The lender will only require your identification, income, and bank account to obtain a payday loan. Payday loans are often lent to people with bad or little credit. A payday loan lender confirms your income and checking account information. They can usually deliver the cash to you as early as the same day.

The lender will get your written permission to withdraw the amount from your checking account electronically. The lender will expect you to repay the loan right after your next payday. If you use an online lender, they will automatically run an electronic withdrawal. If you do not repay the loan in full by the agreed-upon date, the lender will charge a fee, and the cycle repeats with added interest.

Is a payday loan secured or unsecured?

Most payday loans are unsecured, meaning you do not have to offer a form of collateral to take out the loan. As previously mentioned, the lender will get your written permission to have the money withdrawn from your checking account. Alternatively, the lender may ask you to write a check in the repayment amount, which they can cash once the loan is due.

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Why are payday loans bad?

Payday loans come with hefty fees and unfavorable terms, which can take a severe financial toll. Here are some of the biggest reasons payday loans should be your last resort.

  • High interest rates: The interest rate on a payday loan is usually on the higher end of the spectrum for short-term loans. The cost of a payday loan can be 400% APR (annual interest rate) and higher.
  • Renewals create a cycle of debt: Because the lump sum is due relatively quickly, some borrowers find it difficult to repay a payday loan on time. If you aren’t able to pay back the loan by its due date, the Consumer Financial Protection Bureau warns that many states allow payday loans to roll over. Each time a loan is rolled over or a new one is taken out, the lender charges more fees — creating a cycle of debt that can be difficult to break.
  • Typically only available in small amounts: Depending on your state, you may only be able to borrow a few hundred dollars, which might not be enough to cover your emergency expenses.
  • Requires a single balloon payment: Unlike most consumer debt, payday loans don’t allow for partial installment payments to be made during the loan term. You must pay the entire loan back at the end of two weeks.
  • Won’t build your credit: Payday lenders don’t usually report your payment activity to the major credit bureaus. Paying your loan back on time won’t help you improve your credit, but not paying on time can severely hurt your credit.
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