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Bottom Line Up Front

  • These short-term loans can help tide you over until the next paycheck. But they come with high interest rates and can lead to a cycle of debt. 
  • Payday lenders charge high fees, such as $15 to borrow $100, with interest rates that vary state to state. On the high end, rates may soar above 600 percent.
  •  Payday loan alternatives include asking creditors for more time to pay a bill, taking a cash advance on a credit card (understand the terms first!), a checking line of credit or a personal loan.

Time to Read

5 minutes

May 4, 2022

It happens to a lot of people: Your personal finances are okay—you’re paying bills and meeting other obligations—and then something unexpected (and expensive!) happens. You may feel you need some extra cash until the next payday, and you might think a payday loan will solve your problems. 

How Payday Loans Work 

Payday lenders allow borrowers to take out short-term loans to tide them over until their next paycheck, which is why the loans are known as payday loans. If you opt for this type of loan, you’ll probably be asked to write a post-dated check (dated for the loan payment due date) or agree to allow the lender to take the payment directly from your checking account. Keep in mind, you won’t be making several small payments. You’ll be expected to pay the whole loan amount, plus the interest or finance charge, all at once.

Before signing on the dotted line—and maybe leaving your personal finances in worse shape than before—here’s what you need to know about payday loans.

Payday Loan Costs Can Mount Quickly 

Most payday lenders charge a flat fee, but their loans are a lot more expensive than other types. For example, a lender may charge $15 to borrow $100. That doesn’t sound too bad if you pay back the loan on time. But what if you don’t have the money to pay off the full loan amount when payday rolls around? You may decide to renew the loan. That means you’ll pay another $15 fee. Now you’ve paid $30 to borrow $100, assuming you pay on time. 

Each time you roll the loan over, fees add up and it gets tougher to repay. According to the Center for Responsible Lending, some states have new protections against interest rate gouging on payday loans. However, in states with limited protection or no protection, the 2021 average interest rates for a $300 payday loan ranged from 154 percent in Oregon to a stunning 664 percent in Texas. In contrast to those triple-digit payday interest rates, credit card companies can only charge between about 12 percent and 30 percent. 

Let’s look at a real-world example reported by NPR. One woman borrowed $600 from a payday loan lender and was charged an additional $76.45 for a loan due two weeks later. The $76.45 represented an annual interest rate of 300 percent. If she had kept the loan for a year at the same interest rate, at the end, she would have owed $1,800—in interest.     

Arm Yourself With Information 

Knowing the facts and understanding alternatives can help protect you from making an impulsive decision.

  • Be wary of big promises. Does a lender say you can be approved for a loan regardless of your credit history or a poor credit score? These too-good-to-be-true offers usually come with loan terms that can lead to more money troubles than you had originally, and your credit score could suffer.
  • Do your research. Check to see if the lender is licensed in your state. The Consumer Financial Protection Bureau (CFPB) provides a list of state regulator websites
  • Speak with an expert. An on-base financial representative or one of our Navy Federal Credit Union financial counselors can help you figure out your options and provide other financial advice. They can help you assess loan fees and understand the overall cost of the loan.
  • Find a payday loan alternative. Sidestep the high cost of payday loans with these possibilities: 
    • Contact creditors quickly if you can’t make a payment and ask for more time. Many will work with consumers they believe are acting in good faith. 
    • Consider a small Personal Loan or Savings Secured Loan.
    • Think about applying for a Checking Line of Credit.
    • Explore a cash advance on a credit card (but know the interest rate and terms before you do).
    • Build an emergency fund. Even small deposits made regularly to a savings account can provide a buffer for unplanned expenses. Although it may not be helpful to you by the time you’re considering a payday loan, it’ll certainly help you in the future!
  • Special protections for servicemembers. Payday loans (and other financing) offered to servicemembers and their dependents must include certain protections under the Military Lending Act (MLA) . For example, for payday loans, the military annual percentage rate can’t be higher than 36 percent. Most fees and charges (with few exceptions) are included in the rate. Credit agreements that violate the protections are invalid. In 2021, the CFPB re-asserted its authority to examine MLA-related practices to help protect servicemembers. 

You have options besides payday loans. Securing the money you need with a loan from Navy Federal may be a better fit. Contact us to learn more—we’re here to help.

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This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.