When you need money fast, a payday loan may seem like the solution to your problems.
Maybe you’ve lost your job, you’re facing a major car-repair bill or rent is due tomorrow. Whatever your urgent situation, a payday loan can put cash in your hands when you need it most.
But that convenience typically comes with a high cost. While it’s possible to get a payday loan, there are important short- and long-term consequences to consider before you look for one.
What is a payday loan?
A payday loan is a short-term loan for a small amount of money that you typically repay on your next payday. But it can come at a high price.
Over a year, payday loans come with fees and costs that can amount to APRs as high as almost 1,500%, according to the Money Advice Service. And while some payday loans offer same-day cash with no credit check, this short-term access can cost you in the long run.
If you’re not able to repay the original loan on time, you may end up rolling the debt into a new payday loan. And those rollovers can come with additional fees that drive up your payday debt even more.
If you need cash quickly because of an emergency, this type of financing can be appealing. Payday loans can be easy to get, but they are expensive and could make your financial problems worse if you can’t afford to pay it back on time.
Alternatives to payday loans
You have several options if you’re looking for a short-term personal loan. While the chance of getting money right away may help your immediate situation, it’s important to understand the fees and interest rates involved — and the long-term impact they can have on your finances.
Some types of short-term personal loans come with high interest and fees. Here are some types of costly personal loans.
Logbook loans
A logbook loan is another type of high-interest loan. With a logbook loan, you use your vehicle as collateral to back your loan. The lender takes your car logbook or vehicle registration document in exchange for a loan that’s based on the value of your car. When you repay the loan, you’ll get your vehicle’s registration document back.
Like payday loans, logbook loans can be costly and come with high risks. Some logbook-loan companies will give you a loan even if you already have an auto loan on your vehicle.
Some lenders will offer logbook loans up to half of what your car is worth and can come with an average APR of over 400%.
Pawnbroking loans
Another way to get cash quickly is to take something valuable to a pawnbroker, which is a relatively expensive way to borrow. In exchange for pledging the item, the shop gives you an agreed-upon amount of cash that’s based on what the item might actually be worth.
If you repay the loan amount, plus fees, by the agreed-upon due date, you can get your valuables back. If you don’t repay the loan and it was at least £75, the pawnbroker can sell your item to recover the costs of the loan. But if the loan was £100 or more, the pawnbroker must notify you that it will sell your item in advance to give you time to repay the loan and get your item back.
If the pawnbroker sells your item for an amount that exceeded what you took out as a loan, the excess funds will be returned to you.
The interest on pawn shop loans can be expensive, with fees than can amount to very high APRs, like 150%. This high interest may make it difficult to repay the loan.
Credit cards
Putting expenses on your credit card or taking out a cash advance may not be ideal, but it could still be less costly than a same-day loan.
The average interest rate on credit card lending bearing interest was 20.77%.And if you take out a cash advance — using your credit card to access cash — you’re likely to end up having a higher APR. But this still may be a less-costly alternative than some types of personal loans, which can come with triple-digit interest rates.
Family and friends
You may be hesitant to ask family or friends for emergency cash, but if you’re in a bind and know someone who could help you out, this is another option to consider. If a loved one gives you a loan, be sure you’re both clear on the interest and repayment terms. A loan from family or friends may help you repair your finances, but it’s important not to let the loan undermine the relationship.
Traditional personal loans
Another option is a traditional personal loan, which is a loan that offers a lump sum of money and is paid back in set installments over a fixed period of time. Depending on your credit and other factors, you may get approved for a reasonable rate. And if you’re approved, some lenders can fund the loan the same business day.
When reviewing offers from personal-loan lenders, be sure to compare APRs, origination fees and repayment terms. Taking out a small, traditional personal loan will almost always be more cost-effective than a payday loan, logbook loan or pawn shop loan.
Credit union loans
A credit union is a co-operative where members pool their savings to provide one another with credit. If you’re a member of a credit union, you may be able to apply for a loan that is less expensive than payday loans.
You must be a member of the credit union in order to qualify. To be part of a credit union you have to share a common bond with other members. For example, everyone might work for the same company, have the same profession or live in the same area.
Credit unions try to make sure that members don’t take out loans they can’t pay back, so they may assess a borrower’s income as well as how much money they’ve been able to save.
Bottom line
When you’re facing an emergency expense, a payday loan may seem like the fastest way to get the money you need. But that speed and ease can come with high costs, and most payday loans are heavily weighted in the lender’s favour, not yours.
Before you take out a payday loan, be sure to read the small print, understand the loan terms and look at the overall cost of the loan. If you’re willing to shop around, you should be able to find a more affordable personal loan that can fund loans the same business day or within a few business days.
And if you absolutely can’t wait and have available credit on a credit card, a cash advance isn’t cheap but will almost certainly come with a lower interest rate than a payday loan.