Payday loans should be considered as a lender of last resort. Sky-high interest rates coupled with unrealistically short repayment periods trap many borrowers in a cycle of rollovers, partial payments and escalating balances. However, the reality is that for many borrowers, payday loans represent their only option for obtaining money to cover financial emergencies.
If payday loans are your only borrowing option, it’s essential to be educated about how payday loans work, and shop around to obtain the least expensive loan possible. Borrow as little as possible and repay the loan as soon as you can – even if you must make severe budget sacrifices to do so. Once you’ve made it past the financial emergency, begin putting money aside, even if you can only manage a few dollars. You’ll be surprised by how quickly you can accumulate a significant emergency fund – and avoid payday loans in the future.
Payday Loan Features and Terms
Terms for payday loans vary according to the lender and the size of the loan, but many payday loans carry APRs between 300 and 800 percent. It’s not unheard of for payday loans to carry APRs above 1,000 percent. Repayment terms vary, and are pegged to borrowers’ next expected paycheck or government issued check, but the average is about 14 days.
The combination of high APRs and short repayment periods makes it impossible for many payday loan borrowers to repay their loans in full. In response, payday lenders accept partial payments, and refinance – or rollover, the remaining balance into a new loan with a fresh set of administrative fees and interest charges. After only a few rollovers, many payday loan balances exceed the amount of the original loan, despite regular payments by borrowers.
Prepayment penalties are also commonly applied to payday loans. In other words, in the unlikely event that you’re able to repay your loan before the due date, many payday lenders will impose an additional fee, which effectively negates any savings you might have otherwise obtained. Prepayment penalties are often hidden in the fine print of payday loan agreements.
Brick-and-Mortar Lenders versus Online Lenders
There are two major types of payday lenders: brick-and-mortar payday loan stores and online payday lenders. The basics are the same for both, although there are several significant differences between the two types of lenders.
- Brick-and-Mortar Payday Loan Stores: Payments are issued in cash on the spot. Borrowers submit post-dated checks made out to lenders, which are deposited by lenders on the designated repayment date. With brick-and-mortar payday loan stores, you usually have some idea of the source of your loans, although some lenders are operated by corporations located out of state.
- Direct Online Payday Lenders: With direct online payday lenders, loans are issued and collected electronically as deposits and withdrawals to and from borrowers’ bank accounts. The process is executed through the Automated Clearing House (ACH) system. Direct lenders provide their own loans, so that you have some idea concerning the origin of your loan. However, some online direct lenders operate out of state or even abroad, which could present challenges down the line.
- Online Payday Aggregators: Many online payday loan sites are actually operated by loan aggregators that are not lenders at all. Some aggregators work with a specific group of lenders with whom they share borrower information directly. Others operate more like brokers, selling borrower information to the highest bidders, often resulting in borrowers receiving dozens of loan “offers,” more than a few of which are scams.
Contact and Support
Borrowers who have questions or problems concerning payday loans from brick and mortar lenders can usually call or visit the store in person. Online payday lenders should allow borrowers to obtain support by email, telephone, real time chat or some combination of the three. Borrowers should be especially wary of online payday lenders that list only foreign telephone numbers and addresses or no contact information at all on their websites. If you have doubts about a payday lender, contact your state attorney general’s office before providing any personal or financial information.
Minimizing Your Risks with Payday Loans
- Shop around for the lowest available APR
- Borrow only what you need and repay the loan as soon as possible
- Avoid loans with excessive administrative fees or prepayment penalties
- Opt for brick-and-mortar or online direct payday lenders rather than aggregators
- Check out prospective lenders before providing personal or financial information