The typical payday borrower doesn’t take out one loan. According to the Pew Charitable Trusts’ 2012 report Payday Lending in America, state regulatory data showed borrowers taking out about eight loans a year, averaging $375 each, and paying roughly $520 in interest along the way. Pew estimated that 12 million Americans used payday loans in 2010. The figures are dated, but the structure that produces them hasn’t changed: a small loan due in full in about two weeks, which many borrowers can’t repay without borrowing again.
The Consumer Financial Protection Bureau explains the math: a common fee of $15 per $100 borrowed on a two-week loan works out to an annual percentage rate of almost 400%. For comparison, credit card APRs are typically somewhere in the 20s.
What matters most
- Speed is the payday lender’s only real advantage, and several cheaper options are nearly as fast if you start them today.
- The danger is the rollover, not the first loan. Any option that gives you more than two weeks to repay breaks the cycle.
- Asking a creditor for time is often cheaper than borrowing. Many bills can be delayed or split for free.
Start by asking whether you need a loan at all
A lot of payday borrowing covers a specific bill: rent, a utility, a car repair, a phone payment. Before borrowing to pay that bill, call the company you owe.
- Utilities commonly offer payment arrangements and hardship programs, and many states restrict shutoffs during extreme weather. Ask specifically for a payment plan.
- Landlords often prefer a partial payment now and a firm date for the rest over starting an eviction.
- Medical providers usually set up interest-free payment plans, and nonprofit hospitals are required to have financial assistance policies.
- Auto lenders and credit card issuers may grant a skipped or deferred payment if you call before you’re late.
Dialing 211 connects you to local programs that help with rent, utilities and food in many areas. Emergency aid doesn’t need to be repaid.
Faster, cheaper ways to borrow
Credit union payday alternative loans
Federal credit unions can offer payday alternative loans, or PALs, under rules set by the National Credit Union Administration. The interest rate is capped at 28%, and the application fee can’t exceed $20. The first version, PAL I, runs from $200 to $1,000 with one to six months to repay and requires at least one month of membership. PAL II goes up to $2,000 with up to twelve months to repay and can be available as soon as you join. Rollovers aren’t allowed, and you can have only a limited number in a six-month period. Not every credit union offers them, so ask directly.
Small-dollar loans from your own bank
Several large banks now offer small installment loans or advances to existing checking customers, often for a flat fee and repaid over about three months. Terms vary by bank, but they are typically far cheaper than payday loans. Check your bank’s app or ask a branch.
An employer paycheck advance
Some employers will advance part of your next paycheck, directly or through a payroll app. These earned wage access products can be cheap or free, but read the fine print: some charge per-transfer fees for instant access or prompt you to leave a “tip,” and those costs add up if you use them every pay period.
A credit card cash advance
Cash advances are expensive. There’s usually a fee of a few percent, a higher APR than for purchases, and no grace period. They are still much cheaper than a payday loan for the same amount, and you can pay them off over time. This option only helps if you have available credit and a plan to pay it down quickly. See our explainer on how credit card interest is calculated to estimate the cost.
A personal loan
If you need more than a few hundred dollars and have fair credit, an unsecured personal loan may be approved and funded within a day or two. Rates vary widely depending on credit. Watch for origination fees that reduce how much you actually receive.
Family or friends, in writing
Borrowing from people you know can be the cheapest option and the most complicated. Write down the amount and repayment date and treat it like any other bill.
Options that look like alternatives but aren’t
- Auto title loans often carry similar triple-digit APRs, and you risk losing the car you need to get to work.
- Online installment loans with very high APRs give you more time than a payday loan but can cost more in total. Check the APR, not just the payment.
- Pawn loans don’t hurt your credit, but the fees are high and you lose the item if you can’t repay.
- Overdrafting your checking account can trigger fees on each transaction, which can turn a small shortfall into a large one.
Common questions
Are payday loans legal everywhere in the U.S.?
No. A number of states and the District of Columbia either ban high-cost payday loans or cap rates low enough that storefront payday lending doesn’t operate. Rules vary by state, and online lenders must still follow the law of the state where you live.
Do I have special protections if I’m in the military?
Yes. The Military Lending Act caps the cost of most consumer credit offered to active-duty service members and their dependents at a 36% military annual percentage rate, which includes most fees. Base legal assistance offices and military aid societies can also help with emergency funds.
Will a payday loan help me build credit?
Usually not. Most payday lenders don’t report on-time payments to the major credit bureaus, but an unpaid loan sent to collections can still appear on your report.
What if I don’t have a bank account?
Credit unions often have low-cost or second-chance checking accounts, and opening one can make you eligible for a PAL later. Local nonprofit lending circles and community development financial institutions are other options in some areas.
If you’re already stuck
If you’ve rolled a payday loan over more than once, stop and look at the total owed. Then:
- Ask about an extended payment plan. Many states require payday lenders to offer one at no extra cost, which turns the balance into installments. You usually have to ask before the loan’s due date.
- Replace it with cheaper credit. A PAL or small bank loan used to pay off the payday loan ends the two-week cycle.
- Control your bank account. You can revoke authorization for the lender to debit your account, and your bank can help stop recurring withdrawals. You still owe the debt, but you decide when and how it’s paid.
- Get free help. Nonprofit credit counselors can review your budget and negotiate with creditors. If a lender is threatening arrest or harassing you, you can file a complaint with the CFPB or your state attorney general.
Once you’re out, even a few hundred dollars in a separate savings account changes the math next time. It doesn’t have to cover a disaster, only the next bill that comes in before payday.
