5 Ways a Payday Loan Can Send You Deeper Into Debt


You’re tight on cash and payday is still a week away. The bills are piling up and you’re beginning to feel desperate.

A payday loan is starting to seem like the only answer to your cash flow woes. Is it a good idea?

What is a payday loan?

Payday loans — generally provided by non-bank entities — offer you an “advance” on your salary for a fee. They typically have a quick repayment period in the neighborhood of two weeks, by which time you’ll get your next paycheck (thus the moniker).

You secure the loan with either a postdated personal check for the payoff amount, or by providing electronic access to your bank account if you’re using an online payday loan company. If you don’t repay the loan in cash by the due date, the payday lender will cash the check or raid your account.

If you’re facing an unexpected expense and are considering a payday loan to cover it, we’re here to ask you to think again.

It may be tempting to take the fast cash, but here are five ways a payday loan can send you deeper into debt:

1. Interest rates on payday loans are outrageous

According to paydayloaninfo.org, the interest rates on payday loans are typically 400% or more. Why do people sign on the dotted line, then?

The fact that the loans themselves are for relatively small amounts (usually $100 to $1,000), have such a brief term, and have interest rates that may be expressed as a fee instead of a percentage, disguise the fact that you’re getting the raw end of the financial deal.

Even a cash advance from a credit card is cheaper — not that we recommend that, either.

2. Payday loans are Band-Aids disguising bigger problems

If you don’t have the money to cover your bills and other financial needs today, what makes you think you’ll have enough PLUS extra to repay the loan two weeks from now?

Your time is probably better spent combing your expenses and looking for ways to cut back. Alternatively, you could take on a side gig and earn more — check out these 30 ways to turn your talents into extra income.

3. Payday loans can become a vicious cycle

No credit check payday loans don’t conduct credit checks or perform other due diligence to see if you have the financial wherewithal to pay them back. As a result, those who find themselves short at the end of the repayment term may find themselves taking out another payday loan from another company to cover the first one, or allowing their original loan to roll forward for an additional fee.

4. Payday loans can lead to bounced check fees

If you don’t repay the loan and your check is cashed (or in the case of an online payday loan, your account accessed electronically), you’ve not only paid the original, exorbitant interest rate, you’re also on the hook for overdraft or bounced check fees.

In addition, if you develop a history of bouncing checks or overdrawing your account, it can lead to a poor credit score and make it that much more difficult to access more traditional lines of credit, perpetuating the cycle. Your bank might even close your account and it could be difficult to find a new bank that will take you.

5. Payday lenders by other names can leave you open to other risks

Some states have outlawed or tightened restrictions on payday advance loans. However, rather than letting that put a crimp in their style, payday loan companies have branched out.

These lenders may offer installment loans or lines of credit to get around being classified as payday lenders. Or they might operate under another business model altogether, offering car title loans instead of payday loans. Great — now your ride’s on the line. Ugh.

Alternatives to payday loans

So if you were asking yourself “Are payday loans safe?” then it’s safe to say the answer is no, they’re not.

In fact, payday loans almost always do more harm than good. Fortunately, there are alternatives. In the short-term you could try the following:

  • Obtain a personal loan from your bank or credit union
  • Charge the expense to your credit card or get a cash advance
  • Borrow from family or friends
  • Ask your creditors about repayment plans or hardship assistance
  • Use your overdraft protection, pay your bills, and owe your bank a fee

Obviously, none of these are great solutions. But just about anything beats taking out a loan with an interest rate of 400% or more, plus all the other negatives outlined above, when you’re facing dire circumstances.

In the long-term, however, what you want is a solution that prevents you from being in such a precarious financial situation to begin with.

Ultimately, the only route to liquidity is for your income to exceed your expenses.There are only two ways for that to happen: either you increase your income, or you reduce your expenses. If you want to supercharge your savings, you can do both.

Of course, that’s easier said than done. We get it. However, falling into the payday loan trap is not going to solve your money problems either. Focus on healthier ways of obtaining wiggle room in your budget so you can build an emergency fund and never again have your entire financial life derailed by one bad day.

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LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 4.98% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 21, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.98% APR assumes current 1-month LIBOR rate of 1.34% plus 3.89% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
4.98% - 14.24%1$5,000 - $100,000
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8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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