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Are Payday Loans a Scam?

Suppose you’re in a tough spot: Your bills need to be paid and you’re running out of groceries, but your next paycheck won’t come for another week. It might seem like a good idea to apply for a payday loan. However, taking out a payday loan can trigger an unmanageable downward financial spiral. Read on to find out how, and what you should do instead to meet your financial obligations.

What Are Payday Loans?

Payday loans are short-term, unsecured loans. Payment for the loan is due immediately upon the receipt of your next paycheck. You don’t need good credit to be approved, just proof of employment and a checking account. In fact, many such lenders don’t bother to check with the three credit reporting agencies at all. Instead, they just ensure you don’t owe money to other payday loan businesses or have wage garnishment applied to your income.
Because payday loans are unsecured, they come with extremely high interest rates. Depending on the state, you’ll pay between $10 and $30 for every $100 of the loan. For example, a 7-day, $200 loan that will cost you $35 in fees works out to an astronomical APR of 912.5%. However, that kind of important information is usually only found in small print, and not in any advertising material. Instead, payday loans are usually promoted with friendly words like “let us help you out”; and “get cash now!”

The Vicious Debt Cycle

If you were having trouble coming up with $200 when you took out the loan, what is the likelihood that you’ll be able to afford $235 when it comes due? Most states don’t have laws against taking out back-to-back payday loans. When you pay a fee to “roll over” the loan, none of it is applied against your principal, and the interest you owe continues to grow. Over time, you could end up owing more in interest than the amount you initially borrowed!

In 2014, the Consumer Financial Protection Bureau found that over 80% of payday loans are “rolled over” or followed by another loan within 14 days. The CFPB also found that most borrowing activity was for renewals following an initial loan. These facts illustrate that, in practice, payday loans are much more likely to cause even more debt rather than act as a helpful short-term tool to eliminate debt.

Shady Collections

Businesses that offer payday loans aren’t exactly known as arbiters of fairness. If you’re currently tied up with payday loan debt and miss your payments, you might encounter some unsavory collections practices. Familiarize yourself with the Fair Debt Collection Practices Act. It’s a strong set of federal laws to protect you from harassment. If you notice that a collector is violating any of these laws, you should seek damages.


If you need money in a short period of time, what should you do instead of getting a payday loan? First, ask yourself if you have anything valuable you can sell. Next, are there any odd jobs, like fixing a broken door, that you could help someone with for quick cash? Do you have a friend or relative willing to loan you the money? If you need the money for bills, try contacting the company you owe, explain your situation, and inquire about financing options. Chances are, the rates will be better than those you would pay for a payday loan. Obviously these aren’t ideal solutions, but they’re definitely better than taking out a loan that could just make your situation worse in the long-run.

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