Payday Loan

Full definition

Payday loans are among the most expensive forms of credit available to consumers, and understanding their structure helps borrowers recognize when a personal loan is a dramatically better alternative. How they work: You write a post-dated check (or authorize an ACH debit) to the lender for the loan amount plus a fee. The lender gives you cash or a bank transfer for the loan amount now. On your next payday (2-4 weeks later), the lender deposits the check or pulls the ACH. If you cannot cover it, you can roll the loan over by paying another fee, extending the due date by another 2-4 weeks. The real cost: A $15 fee on a $100 two-week loan looks small in dollar terms. But annualized: ($15 / $100) x (365 / 14) = 391% APR. This is not an edge case. The Consumer Financial Protection Bureau (CFPB) reports that the typical payday borrower is in debt for 5 months of the year, paying $520 in fees to borrow $375. Rollover trap: Approximately 80% of payday loans are rolled over or renewed within 14 days, per CFPB data. Each rollover costs another fee. A $300 loan rolled over 5 times can easily cost more in fees than the original principal. State regulation: Payday lending is banned or heavily restricted in approximately 18 states. Many others cap fees or limit rollovers. Some states require installment repayment instead of a single balloon payment. Alternatives: A personal loan from a bank or online lender at 15%-36% APR is dramatically cheaper, even if the rate feels high. Credit unions offer payday alternative loans (PALs) capped at 28% APR. Buy-now-pay-later installment plans and employer-based paycheck advances can also be lower-cost options.

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