Payday loan centers seem to be everywhere these days. Owners of these centers often target specific groups of people and their neighborhoods. But even outside of those neighborhoods, payday loan lenders have many clients. The payday loan industry is huge, and there are more payday loan centers than McDonald’s restaurants. According to the Federal Reserve Bank of St. Louis, close to 12 million of your fellow Americans are using payday’ loans’ each year. Unfortunately, as of 2021, nearly 61% of Americans have less than $1,000 in their savings, and these people are prime targets for payday loan operators.

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Payday loans are short-term installment loans meant for emergencies

Payday loans are a straightforward financial product. The premise is that if you need a small loan, you can go to a payday loan store and get that loan right away. There’s no credit check or extensive underwriting process. But it’s expensive. Very expensive.

These loans are supposed to help individuals and families who have an emergency spending need and otherwise would not have enough money to cover that expense until their next paycheck.  If approved, you can get a deposit to your bank either on the same or next day or be given cash in their store.

The loan becomes due when your next paycheck arrives or two weeks later. Sometimes you’ll write a check, post-date it, and give it directly to them; a process called deferred deposit; other times, you’ll provide them with access to your bank account.

Requirements for payday loans are simple

The qualifications to get a payday loan are easy and most people are eligible for payday loans:

  1. Have a checking account at a bank or credit union, or even a prepaid account
  2. Have proof of income from a current job
  3. Show a form of government ID

The dangers of using payday loans—high interest, rollovers, & stacking

Payday LoansPayday loans are targeted to regular people who are already having a difficult time making ends meet. The loans quickly become a trap. This is why we call them predatory products and most financial writers including myself warn consumers never to use these types of loans. While it is true that you can get the money you need quickly, without too much difficulty, it will cost you plenty.

The fees are terrible

Payday loans have huge charges. For every $100 financed, you can pay anywhere from $10 to $30. You might not think this is a lot of money, especially if you have some sort of emergency, but this is just for a two-week loan. In other words, you could be paying as much as 400% APR on your loan if you viewed it in the same way as a yearly loan obligation. APR is the annual interest rate you pay, so it basically shows how much it costs you to borrow money. You’ll often hear APR rates on commercials that talk about car loans or home mortgages.

It’s easy to get caught up

Because of these high charges, it’s easy to miss the payment by that two-week window. Then you get caught up in a financial nightmare, starting with rollover loans. The interest rate is why payday loans are called a “predatory product.” To compare, one of the highest credit card APR rates allowed in the U.S. is 45% in Colorado – a bargain compared to payday loan rates. Thankfully many states have enacted new legislation to cap how much payday operators can charge.

Rollover loans are a trap

If state law permits, a payday loan can be “rolled over,” which means the lender rolls the existing balance into a new short-term installment loan. Of course, it also means hefty fees get added on – suddenly, that $10 or $30 debt owed becomes much more significant. This is where the payday loan trap comes in. Many payday loan users live paycheck-to-paycheck and can’t meet the obligation to repay the full loan amount in just two weeks. So they wind up “rolling over” the loan. Then the costs start to snowball. Over 80% of payday loans on the books now cover previous loans and not the emergencies or regular living expenses that prompted the first loan.

Tip: Instead of doing a rollover, ask if you can get an extension on the loan, we cover what to ask later in this article.

Don’t make the mistake of loan stacking

Loan stacking means you take out more than one payday loan at a time. Most payday loan centers won’t let you take out an additional loan because, honestly you shouldn’t. But since payday loans usually aren’t reported to credit bureaus, many consumers take out more than one loan at a time from different lenders. You rack up multiple high-interest and high-fee loans and likely will have difficulty paying off those loans. Some states, such as Florida, have laws preventing this and have a central database to record a customer’s loan. Many other states do not.

Payday loans vs other fast-cash products

Payday loans and title loans are different

A payday loan is based upon the idea that you have a regular income and usually a bank account. So you are getting a short-term unsecured loan. A title loan is a secured loan backed by an asset, such as an automobile. Your income is not a determing factor. Typically the loan is based on 25% of the value of the car. If the loan does not get paid, or if you are late, the lending company has the right to repossess the vehicle immediately. Both are considered to be predatory loan products. You should avoid both if you can.

Payday loans and cash advances are different.

When you take a cash advance you are borrowing cash using a credit card that you already have. Most people who have a credit card can qualify for a cash advance. You may not want to do this, as costs are very expensive, but much less so than a payday loan. When you take a payday loan, you are borrowing from that payday loan lender. With a cash advance on your credit card the interest rate will be far less than a payday loan, and the repayment period is far better.

Avoiding payday loans

Earlier I mentioned that you can begin a small savings account for emergencies. You can also raise your credit score, so that you can qualify for a personal loan from a bank, or a have credit card so you have an alternative way to cover emergencies. I’m just like you and had bad credit at one point. I raised my credit by first getting a secured credit card, using it sparingly, and in time graduated to regular credit cards which I still use sparingly. Remember, in general, don’t finance what you can’t afford.

Why you need to start saving

Don’t let an emergency break you – In 2019 the average cost of a “check engine light” repair was just under $400, and in 2020 the average water heater repair for homeowners was just under $600. If you were to make just a small emergency savings account to cover these types of repairs, you probably would not need borrow to cover these types of emergency expenses.Even on a very limited income you still can save for common emergencies. Here is how to quickly start an emergency savings account.

Yes you have enough

How quickly can you build up $600? In just 24 weeks, if you put away just $25 a week you would have that $600. Is $25 a week to much? No. Think about it, a meal for 2 adults at a fast food restaurant can easily run $25.

Easy tip

Set up an automatic recurring transfer for $25 per week from your checking to savings account. You can also ask your HR department to split your paycheck and send $25 directly to your savings account.

The danger signs of payday loans

There are many danger  signs that you should be aware of before you apply to get a payday loan:

If you use a payday loan to cover a recurring bill, like a cellphone bill, you have budget problems and should not use this product. You should start a budget right away, so your essential expenses are planned. Consider asking the cellphone (or other) company to wait a few extra days or split your bill into two payments.

You are in trouble if you use a payday loan to cover another payday loan. This will only get you deeper into debt. Consider asking the payday lender to adjust their terms if you pay a substantial portion of the bill. There are many states which require a lender to offer an extended payment plan. Ask for that extended payment plan, and you’ll probably get it.

You are in danger if you use a payday loan to purchase something unnecessary, like a gift around the holidays. Consider finding another way to show your appreciation for family and friends, or plan ahead with layaway plans. In a “layaway” plan, you pay monthly or weekly directly to a store to save up before you purchase an item. There is no interest at all. When you are done with the payments, you can pick up the item. Sears, Kmart, Burlington Coat Factory, and many other stores have layaway plans. Many online retailers now offer Buy Now Pay Later (BNPL) programs that are similar to layaway, but you can get the purchases immediately. You can also start a small savings account.

If payday loans are the only way you can get a loan, you’re in the danger zone. Take a long look at your credit, and start working with your creditors or consider talking to a credit counselor about a plan that can pay off your existing debts. The right plan can get you on the road to rebuilding your credit so you can qualify for traditional financing that doesn’t charge outrageous fees.

If you don’t have a bank account, you’re probably a frequent customer in check-cashing stores. And many check-cashing stores have payday loans. Even if you don’t take a payday loan, the fees from check-cashing stores are very high. You could be paying around 2% on your payroll check. That’s almost the same as Pennsylvania’s 3% state income tax. Consider going to a credit union or an online bank that will let you start an account even if you’ve had problems before or have bad reports from ChexSystems. Chime is an example of an online bank that accepts most people who apply, you can make mobile deposits (meaning you take a photo of the check), and you get a visa debit card. Wells Fargo also has a bank account designed for people who have had issues with credit.

Alternatives to payday loans

  • Get a loan at a pawn shop if you need money instantly or use apps like OfferUp, if you have a little more time to sell some of your assets.
  • Borrow from a friend or family member. Probably not what you want to hear, but if you tell them your situation and show them the bill with the exact amount, they might help you out. Just make sure that everyone is clear on the terms.
  • Work overtime or at a gig. Consider working extra hours at your job or starting a side-gig to earn extra income.
  • Ask your employer for an advance. While it may feel uncomfortable, this can save you a lot of money and worry.
  • Get a personal loan from a credit union. There are thousands of credit unions all over the United States, and because they are nonprofit, they may not have the same high lending standards as a bank. This type of loan is much easier to repay, and it can be a longer loan term.
  • Check charities and nonprofits in your area. Look for charities that can help with rental assistance, food, medical, or other bills in your area. In many states, you can do this by dialing 211 or visiting 211.org.
  • If you can get a cash advance from your credit card, you might want to look into that instead of a payday loan. But before you do, read about the dangers involved in a cash advance.

Solutions if you’re stuck in a payday loan trap

It’s all too easy to get stuck in the payday loan trap. Here are some techniques to get out.

Try to arrange a payment plan with the payday lender

Work with your payday lender to see if they will give you an extended payment plan (EPP). An EPP will allow you to have extra time to pay off that loan. Many states require it, and loan companies that belong to organizations such as the “Community Financial Services of America (SFSA)” are also required to extend a payment period. But you do have to ask for it because payday loan companies would rather take the profit.

Seek the assistance of a nonprofit credit counselor.

Credit counselors who work for nonprofit organizations have your best interests in mind. They don’t have anything to sell. After discussing your situation with them, you’ll see that you have many more options than you thought. Two of the most common debt relief programs are debt management and debt settlement. A nonprofit credit counseling organization can provide a debt management program directly. Or if debt settlement is more appropriate for your situation, then they will let you know.

Enroll in debt management program

A debt management program can help you pay off credit card debt, collections, and—in some cases—payday loans. A debt management program will work with all of your credit card issuers, as well as payday loan companies (if they agree) and will reduce interest and other charges, then put you on a set monthly payment plan. You’ll be paying back all of what you owe, and creditors will appreciate that, which is why most creditors and lenders agree to get repaid through the program.

A debt management program cannot be used exclusively for payday loans. However, if you have payday loans in addition to credit card debt, you can pay it all off using the same program.

Enroll in a debt settlement program

If you have too much debt, including credit cards and unsecured loans, and you want to pay them off faster, a debt settlement program may be able to help you. The program works by reducing amount owed—you only pay off a percentage of the principal debt owed. But be aware, creditors will see you as a greater risk because you are not paying the entire loan amount back, and your credit rating will suffer.

Declare bankruptcy

If you need to get rid of most of your debts, you can declare bankruptcy. Not every debt may be eligible for discharge, but most will and you will get financial relief. Credit card debt and many other types of debt, including payday loans, are 100% dischargeable in bankruptcy. Bankruptcy can stay on your financial records for up to ten years, depending on the type you file. Bankruptcy also severely damages your credit rating, but you will get a fresh start, and you can build your credit back up.

How to stop ACH withdrawals with the payday lender or your financial institution

If the payday lender refuses to work with you, you can block them from taking electronic withdrawals from your bank account by revoking the payment authorization. The steps are written below:

Step 1: Write the company payday loan company (or any business who takes money out of your bank account).

The information you’ll need to include in the written letter should include:

  1. Your name
  2. Your address
  3. Your phone (and any othe contact information)
  4. The company name (and any representative you are dealing with)
  5. The company address
  6. The subject line should be “Revocation of authorization for debits”
  7. The exact lines

Please stop taking automatic payments from my bank account for payments to my account with your company. My account number with your company is [xxx-xxxx]. I am writing to inform you that I am revoking authorization for you to debit my account via electronic funds transfer:

_ This revocation applies to any and all future debits.

_ This revocation applies to the next scheduled debit. I have not revoked authorization for other debits.

(you can check the one of the above lines depending on if you want to include additional payments or not)

  1. Then sign the letter and put on the date.
  2. You should send a physical letter by U.S. Postal service, with a proof of delivery.

Step 2: Contact your bank or credit union.

When you contact your financial institution, you’ll want to explain in detail what the name of the company (that you are blocking) is, along with the payment amount(s) and dates. Make sure you have the correct name of the company as shown in your bank statements. Often business have slightly (or completely) different names when they debit your account.

A stop payment order, often called a “Revocation of authorization for electronic debits,” is a document that you’ll send to your bank or credit union to formally block payments from being withdawn.

Before you contact your financial instituion, make sure that you have ALL of the information below:

  • You name and account number with the bank or credit union
  • The exact name of the lender as it is listed in your transactions
  • The date when you want the ACH withdrawal to end
  • The dates of any future ACH withdrawals that you will or won’t authorize from the lender

Most banks and credit unions have a form that you will fill out and submit to revoke payment authorization. In rare cases, you may need to send them a formal letter by mail. If so, include the following in the letter:

  1. Your full name (same as you have with the bank)
  2. Your name as recorded by the lender (if this is different)
  3. Date of the letter
  4. Your address & phone
  5. Bank address
  6. The title of the document is “Revocation of authorization for electronic debits.”
  7. The exact name of the payee company
  8. The payee company number
  9. Date when you want the ACH withdrawal to end
  10. Dates of any ACH withdrawals that may occur in the future that you are authorizing
  11. Dates of any ACH withdrawals that may occur in the future that you do not authorize
  12. Use these lines with the exact wording
    “_ I have revoked authorization as of ______ date for any future debits by [Company name].”

“_ I have revoked authorization as of ______ date for the next scheduled debit by [Company name]. I have not revoked authorization for other debits[Your Name].”

(You can choose which one of these two options work best for you)

  1. This line with the exact wording “[Company name] no longer has my permission to take automatic debit payments from my bank account. I have revoked the authorization that had enabled this company to debit my account via electronic funds transfer.” (make sure you specify if you have any additional dates that you give permission to the payee company to deduct funds.
  2. Your checking account number
  3. Your signature at the bottom of this document.
  4. You should send a physical letter by U.S. Postal service, with a proof of delivery.

You can also submit a complaint to the CFPB online or by calling (855) 411-2372.

If you’re stuck in a payday loan trap, contact us.

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Payday loan FAQ

Q:Will my payday loan give me good credit?

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A: No. Typically, on-time payments on a payday loan will not be reported to credit bureaus. Be warned that not paying back a payday loan will usually be reported to credit bureaus.
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Q:Are payday lending practices getting better?

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A: No. New rulings by courts are allowing out-of-state payday loan operators to override state laws. This means operators of payday loan centers often don’t have to follow state consumer protection laws.
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Q:How much can you borrow for a payday loan?

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A: In many states, the limit is $500 or below, and in others, the limit is $1,000. There are a few states, such as Maine, which have no limit at all.
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Q:How much do you pay back on a payday loan?

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A: ALL OF IT. You’ll want to pay all of the payday loan back, on the day it is due. If you are unable to do that, try to work with your payday loan to extend the repayment time. Do not rollover the loan.
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Q:Can I get a payday loan online?

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A: Yes. There are many online payday loan operators. They work similarly to their storefront counterparts.
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Q:What are the pros and cons of taking out a payday loan?

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A: Other than getting some money quickly in an emergency, there are no pros to taking out a payday loan. A payday loan is only a last resort type of loan. The cons are many, including high interest, quick due dates for the full amount due, and a terrible deal for the consumer.
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Q:What is the interest rate on payday loans?

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A: Interest rates vary state by state. Quite a few states cap the loans at 36%, but interest rates climb dramatically outside those states. For example,  Oregon has a maximum rate of 154%, while just over the border in Nevada, you can pay up to 652%. CNBC has a map and lists the interest rate allowed for each state.
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Q:Do payday loans have application fees?

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A: Typically there is no application fee, but the interest rate makes up for that because the total cost is high.
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Q:Can you be denied a payday loan?

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A: Yes, you can be denied for a payday loan. If you have another payday loan out at the moment you could be denied. If you have a non-payment of a payday loan on your credit report or with lenders you might be denied if a lender checks. Some payday lenders will deny the loan if you don’t have direct deposit. However, in general, the majority of people who apply will qualify.
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Q:Is it OK to have bad credit if I want a payday loan and do they require a credit check?

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A: As long as you have a bank account and have a regular paycheck with direct deposit, your credit doesn’t matter. There is rarely a credit check to get a payday loan. Payday loans are marketed frequently to people with challenged credit.
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Q:Can I take out more than one payday loan at a time?

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A: Maybe. Having more than one payday loan at a time is known as “stacking.” Most loan companies have policies expressly forbidding it, and many states ban it. But consumers will often go to more than one payday lender to get multiple loans. However, this is dangerous and likely only to add to the borrower’s financial hardship.
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Q:Do I have to give my bank account information to a payday lender?

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A: Usually yes, but sometimes no. Some lenders will work with consumers who do not have bank accounts; however, the interest rates will usually be much higher. Online payday lenders typically only work with people who have a bank account because they need an account to disburse the funds.
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Q:What if I can’t pay a payday loan back?

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A: If you can’t pay the loan by the agreed-upon date, you can “roll over” the loan in many states. But the interest will grow as well as charges. Another option is to work out a payment arrangement, also known as an Extended Payment Plan (EPP). Many states require payday lenders to offer EPP to customers, but you usually have to ask for it.
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Q:Can I pay off a payday loan early?

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A: Yes. Many payday lenders will allow you to pay early but read the fine print. Some of them may charge a fee, known as an early repayment penalty. Ask your lender or pay it off on the exact date agreed upon if you are unsure.
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Q:How long does it take to get money from a payday loan?

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A: The application forms are usually simple, and once approval is granted, money will be transferred to the borrower’s checking account or given in cash. Most payday lenders advertise the fact that you can get the funds the same day or the next day.
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Q:Do payday lenders have privacy and safety policies?

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A: Lenders are required to keep your information confidential.
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Q:Can I be sent to jail for non-payment?

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A: No. No creditor can arrest you or send you to jail for non-payment of a debt.
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Q:Can my wages be garnished?

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A:  Yes, but only if a lender wins a civil lawsuit against you. This means that the loan would need to be in default and sent to collections. Then the collection agency would file a lawsuit and you would receive a civil court summons. Don’t ignore it, or the collector could win a default judgment against you.
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Q:Do military members have different protections?

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A: Yes. The Military lending Act (MLA) provides additional rights to active duty Service Members, spouses, and dependents. A 36% interest rate cap and no prepayment penalties are some of those rights.
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Article last modified on September 7, 2021. Published by Debt.com, LLC