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Tempted by a Payday Loan? First Take a Closer Look

How can a payday loan seem so affordable yet cost so much? Learn the ins and outs of these convenient but costly loans-and how to avoid them.

by Navy Federal on May 28, 2015


It happens to a lot of people: Your finances are OK—you're making all your bill payments and meeting other obligations—and then something unexpected (and expensive!) happens. You may find yourself thinking, "I just need enough cash to tide me over until payday." This scenario leads some people to take out a payday loan. Unfortunately, rather than helping them, this course of action often leaves their finances in worse shape than before.

Typically, with a payday loan, you write a check to the lender for the amount you want to borrow plus a fee for borrowing the money. The lender agrees to hold the check until the loan is due—usually your next payday. With your authorization, the transactions may be made electronically, with the lender making a deposit into your account and debiting the loan amount on payday.

Costs can mount quickly

At first, the fee charged to borrow money may not seem too expensive. For example, it might be $15 to borrow $100. That wouldn't be too bad if you paid back the loan on payday and didn't borrow again, but that's not what usually happens. More than 80 percent of payday loans are rolled over or renewed by another advance within 14 days.*

If you extend or roll over the loan for another 14 days (assuming you get paid every other week), you may pay another $15 fee. After just three times rolling it over, you may end up paying $60 in fees to borrow $100. As the fees start adding on again and again, it becomes harder to repay each time you roll over the loan and the cycle of continued borrowing often is much longer—half of all payday loans are in a sequence at least 10 loans long.* In this example, with a $15 fee for $100 borrowed for two weeks, if you rolled it over nine times, you'd pay $150 in fees to borrow $100 for less than five months. Now that's an expensive loan!

Find an alternative!

You can avoid the high cost of payday loans. Consider these possibilities:

  • Look into taking out a small personal loan or apply for a Checking Line of Credit.
  • Get free Personal Finance Counseling to create a repayment plan for debts and a budget to keep
    your finances on track.
  • Consider taking a cash advance on a credit card, but be aware of the interest rate and terms before you do.
  • Contact creditors as soon as possible if you won't be able to make a payment and ask for more time. Many are willing to work with consumers whom they believe are acting in good faith.
  • Build an emergency fund. Even small deposits made regularly to a savings account can provide a buffer against emergencies that can throw your budget out of whack.

Special Protections for Servicemembers

Payday loans (and certain other financing) offered to servicemembers and their dependents must include certain protections under the Military Lending Act. For example, for payday loans, the military annual percentage rate cannot exceed 36 percent. Most fees and charges, with few exceptions, are included in the rate. Credit agreements that violate the protections are void.

Information on the Department of Defense rule, alternatives to payday loans, financial planning and other guidance is available at www.militaryonesource.com.

*Source: Consumer Financial Protection Bureau

This article 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.