The truth about payday loans

Before you turn to a payday lender, consider other options that are healthier for your finances in the long run.

July 28, 2020

Payday loans are typically short-term, low-amount loans that are easy to apply for and typically come due on the applicant’s next payday — hence the name “payday loan.” It sounds good in theory, but there’s one big problem: The interest rate and fees make it nearly impossible to pay in a timely manner.

Often characterized as predatory, payday lenders target poverty-stricken areas, as well as the elderly, minorities, folks with low or bad credit, and people with no savings. If you were to search for “payday lenders” on a map, you’ll notice that the highest concentration of these lenders in your city will likely be found in lower-income geographical areas. It’s strategic on the part of the lenders — and crazier still, it’s almost easier to get fast cash than an order of fries: In the United States, there are 23,000 payday lenders, which is twice as many as there are McDonald’s locations!

How payday loans work

The application process is fast; lenders can loan up to a certain amount to a customer almost immediately. Credit checks are not required. The only requirements are that you must have a bank account and the ability to write a check.

If you need a loan, you request the amount needed and write the lender a check for the amount plus fees and interest. Typically, the lender will cash your check at the end of a two-week period. Should you exceed the two-week period without the ability to pay back the loan, more fees and interest are charged. Interest for payday loans in the U.S. can go as high as a staggering 459%! Though each state limits interest rates, on average, the charge is around $17 for every $100 you borrow (gulp).

The convenience of these loans isn’t worth the cost — so how do you avoid using them? We’ve got some pointers to help, as well as some tips for those who already have payday loans they’re looking to get rid of.

Strategies for avoiding payday loans

  • Create a budget and work with a financial coach if you need help
  • Seek community resources to help with your budget planning
  • Download the MyLNK app to help connect you with Lincoln’s community resources
  • Seek other employment, ask for a raise, or start a side hustle
  • Be proactive and save for emergencies
  • Start building your credit

What to do if/when you have a payday loan

  • Pay the loan back as soon as you can and commit to never using payday services again
  • Ask to set up a payment plan with the lender
  • Take on more hours at work and put extra funds toward the loan
  • Sell any unneeded personal property online to earn money to pay on your loan
  • Unsecured (personal) loans through banks are rare, but if you can, take out a personal loan, which typically has a much lower interest rate than a payday loan
  • Work with a financial coach to readjust your budget and get the loan paid off
  • Contact a debt consolidation company to help
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