SAN ANTONIO — Many of us are scrambling to afford housing, food, and utilities as inflation grows but our paycheck stays the same. You might consider a payday loan to help cover expenses, but you run the risk of going into debt.
Payday loans can be a fast way to get $500 or less without a credit check. Yet you can also quickly become deep in debt if you cannot repay it by your next paycheck.
“The Consumer Financial Protection Bureau estimates that about 60% of payday loans are rolled over more than six times, which can mean that the amount you borrow, you end up essentially doubling it because the fees are going to be so much higher,” said Erika Giovanetti, a loans expert with U.S. News and World Report.
For example, if you borrow $300 with a $50 fee, you will owe $350 in two weeks. Roll it over, and you will be charged another $50 and owe $400. Roll it over three times in total and you will pay $500.
“If you’re wanting to borrow with a payday loan, make sure you can definitely afford to repay it in your next paycheck because rolling it over can cost you a lot of money in the long run,” Giovanetti said.
A payday loan can also affect your credit score.
“It will eventually be sent to collections, which is when the real issues start happening,” said Kelly Anne Smith, a consumer finance expert with Forbes Advisor. “This is when your account is turned over to a collections agency and they have to pursue you in order to pay it off. They start calling you and it negatively impacts your credit score, so falling behind on these payments is detrimental to your credit.”
Instead, consider other options first. Ask for a payment plan if you are specifically struggling with utilities.
“Say I’m struggling right now,” Smith said. “I need to figure something out. That’s something a lot of consumers are not aware of or maybe a little ashamed or afraid to do. The worst thing is, they could say no. Nine times out of ten they’re going to work with you and they’re going to come up with something to help make your monthly costs more manageable.”
Use a paycheck advance app such as Earnin, Klover, Dave, MoneyLion, Brigit or Chime for quick cash with no credit check. You will need to get paid by direct deposit to use this type of app.
“You can borrow up to usually like $100 or so from your paycheck and then it’s automatically deducted and they can’t charge fees for the service,” Giovenetti said. “But there will be a late charge if you don’t pay on time.”
Join a credit union and get a payday alternative loan.
“That’s essentially the same concept as a payday loan in that it’s a small loan amount that you repay, but the repayment period is much longer. It’s anywhere between six months and two years,” Giovenetti said.
Payday loans are considered predatory by the Center for Responsible Lending because they are difficult to repay. Payday loans have very few regulations, so understand the terms completely before you decide to get one.