Payday loans are short-term emergency loans people take to cover urgent cash needs until their next paycheck. A typical payday loan averaged $375 in 2020. For a comparatively small amount people need to repay within a couple of weeks, payday lenders may charge an interest of up to $75.
In desperate situations, a payday loan might seem like the only solution, especially for people who have no financial reserves and a low credit score. However, payday loans can trap you in a vicious cycle of money shortage and debt. They don’t resolve financial problems and usually make a money crisis worse due to their outrageous, exploitative interest rates.
What Does It Take to Qualify for a Payday Loan?
Most payday lenders ask for the following basic requirements:
- An active checking account
- A source of income
- Valid ID
In other words, almost anyone who has a job and is older than 18 can qualify for a payday loan. Many payday loan applications get approval within minutes. This ease of taking out high-interest loans is the bait that hooks people into financial slavery.
Unlike reputable financial institutions, payday lenders will usually approve people for loans without a credit check. Close to 12 million Americans fall victim to this predatory loan system each year. Most of them are financially vulnerable people who live paycheck to paycheck and have no savings account or credit card.
Who Cannot Get a Payday Loan?
In some cases, payday lenders deny loan applications. This usually happens when the applicants:
- Can’t prove their income
- Make less money than the required minimum
- Don’t have a steady income (like independent contractors or temporary workers)
- Don’t have a checking account
- Already have past due payday loans
- Don’t have a U.S. citizenship
- Are younger than 18 (or, in some cases, 21)
It is important to keep in mind that payday lenders protect their interests. Most denied loan applications occur because the lenders aren’t sure they will get paid on time. For example, people without an active checking account can’t write a post-dated check for the loan amount plus fee, which is an essential requirement with most lenders.
Why Payday Loans Are So Bad
Let’s say Steve, a young man from a disadvantaged background, urgently needs cash to fix his car. He has no savings and the next paycheck is two weeks away. Steve borrows $500 from a payday lender, committing to repay the loan plus $75 in interest as soon as he gets his paycheck. That’s a 15% interest for two weeks.
But then it gets worse. When Steve’s paycheck comes in, the payday lender automatically gets $575. This doesn’t leave Steve enough money to pay for rent, utilities, and food that month. What does Steve do? He may see no choice but another payday loan. Soon, he’s firmly locked into a cycle of loans, abusive interest rates, and debt.
As the loan rolls over every couple of weeks, the borrower will continue paying interest. Over a year, the $75 two-week interest will balloon to almost $1,900. That’s a devastating sum for someone who couldn’t afford to get his car fixed.
Alternatives to Taking Out a Payday Loan
Before you take out a payday loan, explore every possible alternative. For most people, payday loans are a really, really bad idea. Even if you have no insurance and are facing urgent medical bills, car repairs, or other sudden expenses, give payday lenders a wide berth.
Obviously, the best alternative to a payday loan would be to avoid needing a loan in the first place. To do that, most people would need to overcome two major financial hurdles: lack of savings and a poor credit score.
Depending on your circumstances, you may need to:
- Avoid taking on new debt
- Make monthly credit payments on time
- Practice financial discipline by working out a sound monthly budget
- Increase income by taking on a second job
- Hold a garage sale for immediate cash
If you have lived with a poor credit score, an empty checking account, and high-interest debt for many years, breaking out may take a lot of effort. Once you succeed, however, you can enjoy higher financial security and a safety net of emergency savings.
What to Do When You Need Emergency Cash
Even if you resolve to adopt more sustainable long-term financial practices, you might need an urgent loan right now. What to do then?
Some people are lucky enough to have a supportive network of family and friends who can help them out in a tough situation. If this doesn’t apply to you, you can explore other options.
Charities and nonprofits
Look for a list of community centers and nonprofit charities in your state to see if you qualify for help. Often, charity organizations will fund food, gas, and clothing for people in emergency circumstances. Remember Steve? Instead of taking a second payday loan, he could ask a local charity to help him pay for living expenses the next month.
If you are eligible to become a federal credit union member, you may qualify for an alternative payday loan with a lower interest and more flexible repayment terms. Typically, applicants can borrow up to $1,000 with an interest rate of up to 28%.
Bad credit loans
Many victims of payday loan exploitation have low credit scores. Before you approach payday loan sharks, is worth checking if you qualify for a bad credit loan from a reputable lender. A pre-qualification check won’t hurt your credit score. If the lender approves your application, you could spread out payments over a few years and commit to a feasible repayment plan.
Paycheck advance apps
If you have a regular paycheck and need urgent cash, you might consider using a low-fee paycheck advance app such as Earnin. The app may offer you an advance of a few hundred dollars on your next paycheck after confirming your employment.
Please remember that paycheck advances can only provide a temporary solution. For a feasible long-term strategy, you may need improved financial discipline, a solid budget, or better earning opportunities.