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Payday loans are designed to cover emergency and short-term payments but they come with very high-interest rates. If you are unable to repay your payday loan, you risk incurred fees and potentially having to repay more in interest than the original loan amount.

How do payday loans work?

Payday loans are a short-term solution for consumers having financial difficulty but who need to make payments or cover emergency expenses.

Consumers can apply for a payday loan from a payday lender, in-store or online, with just a valid ID, recent pay stub and bank account number.

Loan amounts can vary from $50 to $1,000 depending on state law and personal financial profile.

If your application is successful, you can receive cash almost immediately or within a maximum of 2 days. This amount will then need to be repaid in full on the borrower’s next payday, plus interest.

Interest rates for payday loans are typically very high, with an average of $15-$20 for every $100 borrowed. This equates to an APR of around 391% to 521%.

Due to their sky-high interest rates, payday loans are not designed for ongoing financial needs but should only ever be used for emergencies.

Why are payday loans high risk?

Payday loans incur extremely high interest rates in addition to many associated fees. This means that if you default your loan repayment, you risk paying more in interest and associated fees than the original amount of your loan. Subsequently, this can draw you into a negative financial cycle which is difficult to get out of.

Often, borrowers who cannot secure loans with traditional financial institutions turn to payday lenders who tend to be less demanding about credit history or other credit checks; however, this means that the loans are higher risk for the lenders and justifies the extreme interest rates.

If you are unable to meet your repayments in full and on time, lenders could extend the due date but this usually incurs an additional fee and may impact your credit rating in the future.

Key Points

  • If you cannot pay your payday loan, you should speak to your lender
  • Usually, you can work together to make a new repayment plan
  • In extreme cases, your payday lender could take you to court

What happens if you cannot repay payday loans?

If you are unable to repay your loan on the due date, there may be the option to “rollover” payment, if state law permits. However, the longer the loan is extended, the interest will continue to grow.

Rollover fees can lead to borrowers having to pay back a great deal more than the original loan. To give an example, the average payday loan is $375 with a typical interest rate of $15 per $100 borrowed. This would mean that the total to pay back would be $431.25. However, if they do choose to roll the loan over, the new amount would be $495.94. This is how payday loans quickly become unaffordable for the lender.

What are the associated costs and fees of a payday loan?

Payday loans will charge a percentage or dollar amount for every $100 borrowed; however, this fee will vary between states and between borrowers.

Rollovers – if you cannot repay your loan on the due date, and if rollovers are permitted by your state’s law, your payday lender may allow you to extend the due date of your loan. However, this in turn will incur another fee in addition to the original balance that was owed.

Repayment plans – according to some state laws, payday lenders are required to offer extended repayment plans for borrowers who are struggling to repay their payday loans. This will vary depending on the state and may or may not incur a fee. If a repayment plan is possible, this can be a better option than borrowing again and getting into a negative financial spiral.

Late fees – if you are unable to repay your loan on time, it is possible that your lender will charge you a late fee, again depending on which state you are in. If you are due to repay a loan and you have non-sufficient funds in your bank account, your bank or credit union may also hit you with a non-sufficient funds charge.

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If you cannot repay your payday loan, you will incur additional fees and interest will continue to accrue.

What alternatives are there for payday loans?

There are many different alternatives available for payday loans that will not incur the same amount of risk.

Credit unions or online lenders – taking out a personal loan from a credit union or online lender will typically carry a much lower APR than a payday loan. Credit unions normally offer the lowest rates for applicants with bad-credit but only union members can apply. Some online lenders will cater for bad-credit applicants but, similarly to payday loans, may incur higher interest rates.

Banks – if you are in a financial bind and looking for a quick fix, it may be worth going to your banik to see if they can offer you a small-dollar loan. More and more mainstream banks are starting to offer this service to cover their consumers for emergency expenses. If you have a good credit history, this may be the right option for you.

Friends and family – if you are struggling financially in the short term, it may be advisable to ask a friend or family member to lend you some money. This will negate the need for credit checks and can save money on interest rates. However, you will need to ensure that you can repay the loan and that it will have no negative impact on the relationship.

Interest-free cash advance apps – Mobile apps, such as Earnin and Chime, can offer interest-free cash advances on your paycheck for those who need a quick financial fix. Usually, there are limits to how much you can borrow and the apps will have particular eligibility requirements.

Richard Allan

Richard Allan

Richard Allan is the founder of Capital Bean and a passionate writer about personal finance, budgeting and how to save money at home and work.

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