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Everything you need to know about payday loans

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For the millions of Americans living paycheck to paycheck, running out of money is a constant, looming concern. Approximately 12 million people take out short-term, unsecured loans — sometimes called “payday” loans — every year, according to the Federal Reserve Bank of St. Louis. And though these loans may help them survive until they receive their next paycheck, they also exact a steep toll. Still, with millions of Americans out of work or facing reduced hours due to the COVID-19 pandemic, many will continue to depend on this dangerous financial tool. 



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Angela Lang/CNET



Angela Lang/CNET


© Angela Lang/CNET
Angela Lang/CNET

If you don’t have a strong credit history, it may be difficult to secure a traditional loan or credit card. But there are plenty of lenders that will let you borrow without a credit check, with few questions asked. The terms will be severe, however, and they’ll certainly end up costing you far more than you borrowed. With a deserved a reputation for “predatory lending,” payday lenders have led many borrowers into a spiral of debt and regret. 

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If you’re short on cash, you’re not alone. But before you take out a payday loan, let’s review what they are, why you should avoid them — and who you can borrow money from instead.

Read more: How to repair your credit

What is a payday loan?

A payday loan is a short-term, unsecured loan that usually comes with a high interest rate. Most payday loans come in modest amounts — typically $500 or less.

With a traditional loan, you receive a lump sum and then start to make payments back over a set amount of time — from a few months to a few years — with a “reasonable” rate of interest added on. With a payday loan, the full amount comes due all at once, including the interest and fees. With most, you’re required to write a postdated check for the full amount due — the loan, plus interest and fees — or give your lender permission to debit the money from your bank account on that date. 

Interest rates for payday loans are much higher compared to traditional loans. A standard APR for a personal loan ranges from 6% to 36% — but may lenders offering payday loans charge annual rates of 100% or more, and some have been found to exceed 1,000% according to a 2013 ProPublica investigation. That noted, some states have limitations on interest and fees — and in some states, payday loans are altogether prohibited.

It’s also worth noting that payday loan lenders tend to target people who live in areas where poverty rates are high and income levels are low — as well as minorities and economically disadvantaged groups, who may have traditionally had greater difficulty qualifying for conventional loans, according to a study by the St. Louis Fed.

Read more: Five myths about your credit score and credit history

Why you should stay away from payday loans

There are twice as many payday loan lenders than McDonald’s restaurants in the US — and borrowing money from one is about as easy as ordering a burger and fries. Getting approved is relatively easy: Many payday loan lenders won’t even check your credit, so a tarnished credit history won’t be a factor.

That’s an advantage for people with poor or limited credit histories. But the high interest rates and strict repayment terms force many into a payday loan trap where they’re forced to take out new loans just to pay back existing ones. 

If you don’t have enough cash to repay your loan by its due date, the lender can automatically trigger a withdrawal from your bank account. And if you don’t have enough money in your bank account to cover the charge, you could face an additional hit from an “insufficient funds” penalty. You may also be subject to penalties from the lender if they don’t get your money on time. 

If your state allows payday loan lenders, you might see them in some parts of your city and not others. For instance, there might be more of them where poverty rates are high and income levels are low. These types of lenders tend to target minority groups as well as those who have very low credit scores who don’t otherwise qualify for traditional loans.

Read more: What are credit repair services — and are they worth the money?

Payday loan alternatives

If you’re in urgent need of money to cover basic expenses, buy food or pay off high-interest debt, there are other options to consider. Here are a few:

Online lenders 

There are lots of personal loans available online that more reasonable interest rates. Even if you have less-than-stellar credit, some lenders may look beyond your= credit score when evaluating eligibility. 

  • OneMain Financial doesn’t have a minimum credit score requirement and you can borrow as little as $1,500, depending on where you live. APRs range from 18% to 35.99% and terms are two to five years. They also have an option for prequalification to see if you’re eligible without applying first.
  • Avant loans start around $2,000 and your credit score needs to be at least 580 to qualify. APRs range from 9.95% to 35.99% and repayment terms range from two to five years.
  • Upstart takes into consideration your education history and experience when evaluating eligibility. You can borrow as little as $1,000 and get your money within a day of approval.

These lenders tend to have higher-than-normal interest rates compared to other personal loan lenders. However, they’re all much cheaper compared to payday loan lenders. 

Credit unions

If you have an account at a local credit union, you may have an easier qualifying for a personal loan. Most interest rates at credit unions are capped around 18% — even for those with low credit scores. 

Many credit unions also offer payday loan alternatives — offering small-dollar loans and short repayment terms ranging from one to six months. Many credit unions require you to join before borrowing, but are willing to work with you if you don’t have great credit. 

Recruit a cosigner

If you can’t get a loan from an online lender or credit union, you may want to ask a friend or family-member to cosign a loan. The cosigner should have decent credit; it’s their score and credit history will help get you over the eligibility hump. Keep in mind that if you fall behind on payments, not only will your credit history suffer; so, too, will your cosigner’s.

Read more: How to repair your credit

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Credit Card Deal: American Express Blue Cash Preferred®

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If the pandemic has had a lasting effect on your spending habits, then it’s likely that you eat in more often, and spend more time cooking at home and watching television. If there’s one credit card that’s suited to this lifestyle, it’s the Blue Cash Preferred® Card from American Express, which is now offering new applicants the opportunity to earn up to $350 in cash back. Terms Apply.

How this card works

New applicants of the Blue Cash Preferred® card can earn $150 in cash back after spending $3,000 on purchases within six months of account opening. You’ll also earn 20% back on all your Amazon.com purchases within six months of account opening. This cash back is limited to your first $1,000 in purchases, which means that you can earn up to $200 cash back (for a combined total of $350 back). The cash back will come in the form of a statement credit that reduces your balance, so you won’t need to redeem any rewards or be concerned with points that can expire.

This card also offers some of the highest rates of cash back that you can earn from a credit card, including a whopping 6% back (on up to $6,000 spent per year) at U.S. supermarkets (worth up to $360 per year). You also earn unlimited 6% cash back for purchases from dozens of select U.S. streaming subscriptions including Netflix, HBO Max, Amazon Music Unlimited and Disney+. Furthermore, you’ll earn 3% cash back at U.S. gas stations and on transit purchases including taxis, rideshare, parking, tolls, trains, buses (and more), plus earn 1% back on all other purchases.

What does it cost?

This card has a $95 annual fee, but it’s waived the first year. The card also offers new applicants 12 months of 0% intro APR on new purchases, then a variable rate 13.99% – 23.99% applies.

Bottom line

If you’re going to sit at home, cook and watch TV, you might as well earn as much cash back as possible. By taking a closer look at the American Express Blue Cash Preferred, you might find that you’re eligible for more cash back than you ever thought possible.

See Rates & Fees for Blue Cash Preferred by American Express.

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A credit repair company could improve your chances of getting approved.

Credit Repair companies, like Credit Saint, specialize in finding and helping you remove mistakes on your report to help you improve your credit.

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