Payday Loans: The Complete Guide to Their Treachery & Your Rights

In 2017, a study by CareerBuilder found that 78 percent of U.S. workers live paycheck-to-paycheck. What’s even worse is that a study done last year by Go Banking Rates found that 69 percent of Americans have less than $1,000 in savings.

For those families, even a small emergency can become a financial disaster. And in a moment of desperation, one might consider a payday loan, a type of loan that’s marketed as being short-term for people who need quick cash, just to float them until their next paycheck.

But what the marketing for payday loans won’t tell you is that they come with exceptionally high interest rates, fees, and other predatory practices. In fact, they’re designed to take advantage of people with poor credit and not a lot of spare cash, creating cycles of debt that can trap you for months or even years.

If you’re considering a payday loan, know this: It’s probably not in your best interest to take out a payday loan, no matter who you are or what your circumstances may be. Before you even walk into a payday loan shop, stop and read this first! We’ll explain all about how payday loans work, why they’re a bad idea, and what some better alternatives may be.

And if you’ve already fallen victim to payday lending and are looking for help, this article is also for you. Later on, we’ll talk about some ways you can seek help getting out of a cycle of payday lending, and how you can get justice against a company that’s taken advantage of you.

What Is a Payday Loan?

A payday loan is an extremely short-term loan — usually, you’re expected to pay it back from within a few weeks, up to around a month.

Payday lenders have traditionally operated out of store fronts (they’re regulars in strip malls). There are still plenty of physical payday loan locations, but some payday loans can now be acquired online. According to the Community Financial Services Association of America (CFSA), more than 19 million families have taken out a payday loan — that’s around one in every six households.

These types of loans are marketed toward people who don’t have a lot of spare cash, but need some right away, usually because of an unexpected bill or an emergency. They’re called “payday loans” because the expectation is that the borrower will receive cash right away, and pay it back on their next payday.

How Do Payday Loans Work?

Here are some of the steps and characteristics of a payday loan:

• It’s for a small amount of money. Most states put a legal cap on how much a person can borrow in a payday loan (usually ranging from $300 to $1,000). The average size of a payday loan in the U.S. is $375.

• It has a short term. Many loans have terms that are months or years long (like a 30-year home mortgage). For payday loans, the term is extremely short — usually a week or two, but sometimes up to a month. They’re designed to be due on the day of the borrower’s next paycheck.

• There are no installments. Payday loans are due all at once, unlike other loans where you chip away at the principal and interest with incremental payments over time.

• Interest is very high. We’ll get into this more below, but payday loans are known for interest rates that are higher than any other type of loan. They’re even higher than credit cards.

• There’s no credit check. Here’s how payday lenders get around the credit checks that are typically required for loans: They require you to prove your employment and income, and they either require access to the bank account where you receive direct deposits for your job, or they require a post-dated check that coincides with your next payday. That way, they can automatically collect on the loan right when you get paid, which ensures you’ll have enough money in your account to cover the loan and interest. This is why payday loans are more likely to be used by people with poor or no credit history.

What’s So Bad About Payday Loans?

Well, a lot of things.

Payday loans aren’t like other kinds of loans, in that your credit doesn’t matter. In fact, they’re marketed toward people with poor or no credit, because they typically aren’t approved for other types of loans.

But bad credit and other types of financial struggles, like living paycheck-to-paycheck or having no savings, go hand-in-hand. The people who are targeted by marketing for payday loans often turn to them out of desperation when they need money in an emergency. Then, lenders take advantage of them in a number of different ways.

Interest Rates

The biggest way that payday lenders rip off their customers is through exorbitantly high interest rates. Payday loans are known for having interest rates that can exceed 400 percent.

According to the Pew Research Center, the average payday loan is for $375, and the average interest paid on a loan of that size is $65. If we assume the term of the loan is two weeks (fairly standard for most payday loans), that comes out to an APR of around 450 percent annually. For comparison, the average interest rate on a personal loan is around 9.4 percent, according to Experian, and even credit cards typically have interest rates around 20-25 percent.

Renewal Fees

High interest rates aren’t the only way payday lenders victimize their customers.

Many borrowers find that by payday, they won’t be able to pay off their loan and the interest, especially if they live paycheck-to-paycheck and need that money for their regular bills. Because of this, some payday lenders offer the option to “renew” the loan, meaning the due date is pushed back, but for a fee. Plus, interest keeps accruing during the extended term of the loan.

For a $375 loan extended two more weeks, this would mean paying back the $375 principal, plus $130 in interest and a renewal fee.

In some places, local laws prohibit payday loan renewals. However, lenders often get around that regulation by allowing borrowers to just take out a “new” loan to cover the cost of the original loan and its interest.

Collections

If, for some reason, there isn’t money in your account on payday for the lender to pay back the loan and interest, payday lenders are known for being very aggressive about seeking repayment.

They’re also quick to sell unpaid debts to debt collectors, who can then harass you with phone calls and mail, and sue you for your unpaid loan. If the debt collector wins that lawsuit, they can sometimes garnish your wages or seize assets for payment.

The Impact on Your Credit

If you fail to pay back your payday loan, it will likely be reported to the three major credit bureaus, negatively impacting your credit score.

But unlike other types of loans, where making payments on time can help better your credit score, payday loans are unlikely to be reported if you do pay them off in time. It’s just another way they’re financially a worse choice than many other types of borrowing money.

Perpetuating a Cycle of Debt

Payday loans, with their high interest rate, renewal fees, and target market of people who are not financially literate, are designed to trap their customers in a cycle of debt. Pew reports that the average payday borrower takes out eight loans per year and pays more than $500 in interest and fees annually.

Who Regulates Payday Loans?

Federal legislation to regulate the payday loan industry has been introduced, but has not been adopted as law.

However, a number of states have enacted their own legislation that targets this industry, or limits some of its more predatory practices.

Permissive States

In 31 states — Alabama, Alaska, California, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming — payday loans are legal with few regulations.

Ohio voters passed a measure in 2008 that capped payday loan rates, but lenders found a loophole by using other lending laws, and that was upheld by the state’s courts.

In Virginia, payday loans are required to be payable in two pay cycles, but lenders have gotten around this law by structuring their loans as open-end lines of credit.

In Washington State, borrowers cannot take out more than eight payday loans per year.

Restrictive States

16 states — Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont, West Virginia — and the District of Columbia have either banned payday loans, or passed rate caps that keep their interest rates reasonable (36 percent is a common rate cap in states that have passed this kind of legislation). 

Hybrid States

In the remaining three states — Maine, New Mexico, and Oregon — regulations exist, but they aren’t enough to keep payday loans from having predatory interest rates and fees.

Considering a Payday Loan? Read This Payday Loan Checklist First

If you’re considering a payday loan, know that there are other options, which we’ll cover more below. Before taking out a payday loan, use this checklist to see if you’re in a position to do so without putting yourself in a worse financial place.

• Consider other solutions. We have a whole list of them below.
• Comparison shop. If you have to get a payday loan, try to shop around and find the lender available to you with the lowest interest rates and fees.
• Only borrow what you can afford to pay back. Make sure paying back the loan with your next paycheck won’t leave you unable to pay your regular bills.
• Don’t borrow from more than one lender at a time.
• Know when your payment is due, and plan for it in your budget.
• Look for organizations that can help you financially. Many states, counties, and cities have organizations that offer short-term help to people facing financial emergencies.
• Set up a budget and start working on an emergency fund, so you have savings ready for the next emergency.

What to Do Instead of Getting a Payday Loan

Even if a payday loan feels like your only option, it may not be. There are alternatives to payday loans you may want to consider:

• Take advantage of emergency assistance. Government programs exist to help Americans in need of help paying their bills. Some places to start looking for help include your local public housing agency, the USDA’s Supplemental Nutrition Assistance Program, your state’s Low Income Home Energy Assistance Program (LIHEAP), and local food banks.
• Borrow money. If you have a friend or family member who can help you out with a loan, this is a better option than a payday loan.
• Pay with a credit card. If you have a one-time financial emergency, putting it on a credit card is often less expensive than taking out a payday loan. You might accrue some interest if you aren’t able to pay the full amount right away, but credit cards generally have an APR around 20-25 percent — much lower than payday loans.
• Get an advance on your paycheck. Some employers will allow you to collect the portion of your paycheck you’ve already earned before payday. This will vary from workplace to workplace, so check in with your boss or HR to see if it’s an option.
• Sell or pawn belongings. If you just need to cover a one-time emergency cost, see if you have any valuable items you’re willing to part with. Selling or pawning them can get you the cash you need without trapping you in debt.
• Get a personal loan. If your bank will grant it to you, a personal loan is virtually guaranteed to come with lower interest rates than a payday loan.

How to File a Complaint About a Payday Loan or Lender

Payday loans fall under the purview of the Consumer Financial Protection Bureau (CFPB), which was created as part of a law passed in 2010 in response to the 2007-2008 financial crisis and the Great Recession.

The CFPB takes complaints related to payday lenders under these categories:

• Unexpected fees or interest
• Unauthorized or incorrect charges to your bank account
• Payments not being credited to your loan
• Problems contacting the lender
• Receiving a loan you did not apply for
• Not receiving money after you applied for a loan

If you have questions about payday loans, you can also contact the CFPB for clear, unbiased answers. You can submit questions online, or call (855) 411-2372.

Looking for Justice After a Payday Loan?

If you’ve fallen victim to a payday loan store’s shady practices, you can get justice. At FairShake, we work to put the power back in consumers’ hands, where it belongs. We can help you find out how to file a complaint, and if needed, guide you through the legal process of consumer arbitration. Ready to get your fair shake? Take action today.