Payday loans, title loans and safer alternatives
In short: a payday loan is a small, short loan, usually due on your next payday, with fees that work out to an APR of around 400%. Many borrowers can't repay in two weeks and roll over the loan, paying new fees each time. Before you borrow, ask about lower-cost options such as a credit union small-dollar loan, a payment plan or help from your employer.
How payday loans work
You borrow a few hundred dollars and give the lender a post-dated check or permission to take the money from your bank account. A typical fee is $10 to $30 for every $100 borrowed. At $15 per $100 for two weeks, that is an APR of almost 400%. Rules differ by state, and some states ban these loans.
The rollover trap
If you can't repay on the due date, the lender may let you pay just the fee and roll over or renew the loan, charging a new fee. Repeat that a few times and the fees can be more than you borrowed. Repeated attempts to take money from your account can also cause bank fees.
Car title loans
A title loan uses your car as security. The costs are similar to payday loans, and if you can't pay, the lender can take your car, which may also mean losing your way to work.
Buy now, pay later
"Pay in 4" plans split a purchase into a few payments. Many charge no interest if you pay on time, but there can be late fees, and it is easy to have several plans running at once. Count them in your budget like any other bill.
Options to ask about first
- Credit union payday alternative loans (PALs): many federal credit unions offer small loans with an APR capped at 28% and an application fee of at most $20, usually after you have been a member for a while.
- A payment plan with the company you owe, such as a utility, hospital or landlord.
- A small loan from your bank, or a pay advance offered by your employer.
- Local help: community organizations, religious groups and non-profit credit counsellors.
- Your own emergency fund, even a small one, for next time. See Emergency fund basics.
If you already have a payday loan
- Ask the lender whether your state requires an extended payment plan.
- You can tell your bank and the lender to stop the lender taking money electronically; the CFPB explains how.
- Check that the lender is licensed in your state. Unlicensed online lenders may break state law.
- Active-duty service members and their families have extra protections under the Military Lending Act, including a 36% rate cap on many loans.
Handy tools
- Loan and EMI calculator: monthly payment, total interest and a year-by-year table.
- Monthly budget planner: see what is left each month and how your spending splits up.
General information, not financial advice. Rules, fees and rates change and depend on your situation. Check with your bank, the provider or a qualified professional before you decide.
Sources
- CFPB: Payday loans
- CFPB: What is a payday loan?
- CFPB: What does it mean to renew or roll over a payday loan?
- CFPB: How can I stop a payday lender from taking money from my account?
- CFPB: Do buy now, pay later loans have fees?
- NCUA: Payday alternative loans
- CFPB: What is covered under the Military Lending Act?