Lesson 2 of 3 · 2 minute read
Payday loans and cheaper options
Why payday and title loans cost so much, and what to try first.
How a payday loan works
A Payday loanA small, short-term loan that's usually due on your next payday. The fees are very high compared to other loans.More in the glossary is a small loan that’s usually due on your next payday, often in two weeks. You usually give the lender a check or access to your bank account. On the due date, the lender takes back the loan plus a fee.
Why it costs so much
A fee of $15 for every $100 sounds small. But that’s for just two weeks. Over a year, it works out to an APRAnnual percentage rate. The yearly cost of borrowing money, including interest and some fees, shown as a percent.More in the glossary of about 391%. Most credit cards cost far less than that.
The rollover trap
If you can’t pay the whole loan on the due date, the lender may let you RolloverPaying just the fee on a payday or title loan to push the due date back. You still owe the full amount, and you pay a new fee each time.More in the glossary. You pay just the fee, and the due date moves back. But you still owe the full amount.
Say you borrow $400 and the fee is $60. If you roll it over four times, you’ll pay $300 in fees, and you’ll still owe the $400.
Title loans
A Title loanA short-term loan that uses your car to back it. If you can't pay it back, the lender can take your car.More in the glossary works in a similar way, but it uses your car to back the loan. If you can’t pay, you could lose your car.
Try these first
- A credit union. Some federal Credit unionA not-for-profit alternative to a bank that is owned by its members. It often has lower fees and lower loan rates than big banks.More in the glossary offer small “payday alternative loans.” The APR can’t be more than 28%, and the application fee can’t be more than $20.
- A payment plan. Ask the company you owe for more time. It often helps to ask before the due date.
- Your employer. Ask if they offer a paycheck advance.
- Local help. Call or text 2-1-1 to find programs that help with rent, utilities, and food.
- A nonprofit credit counselor. They can help you make a plan, for free or at low cost.
Some states don’t allow payday loans, and some limit the fees or the number of rollovers.
A Payday loanA small, short-term loan that's usually due on your next payday. The fees are very high compared to other loans.More in the glossary costs a lot. A fee of $15 for every $100 for two weeks is an APRAnnual percentage rate. The yearly cost of borrowing money, including interest and some fees, shown as a percent.More in the glossary of about 391%.
The loan is usually due on your next payday. Then the lender takes back the loan plus a fee.
If you can't pay it all, the lender may let you RolloverPaying just the fee on a payday or title loan to push the due date back. You still owe the full amount, and you pay a new fee each time.More in the glossary. You pay the fee again, but you still owe the full amount.
A title loan uses your car to back the loan. If you can't pay, you could lose your car.
Try other options first. Ask a credit union, ask for a payment plan, or ask your employer. You can also call 2-1-1 for local help.