Why Use Payday Loans?
Editor’s Note: Payday loans are a bad idea. If you are looking for a payday loan to pay bills or other expenses, we recommend exploring getting a personal loan instead. Before applying for a payday loan for an emergency expense, we recommend considering a cash advance on your credit card or an overdraft line of credit. If you’re considering a payday loan because you have inconsistent paychecks, we recommend checking out some new apps that help even out paychecks. Many credit unions offer alternative payday loans that are less expensive. If you already have payday loans and continue to roll them over, we recommend contacting a credit counseling agency to help get you out of debt. If you are struggling with debt then read our list of the best debt consolidation companies or best debt settlement companies.
We all suffer cash flow problems from time to time, and often wonder if a short term, small loan is the only way out of the black hole where our bank balance should be. During these times you may think a payday loan is the best small loan that will allow you to survive until you get your next paycheck. As there is no credit check with payday loans they attract people with bad credit. For many people with bad credit payday loans feel like the only option.
There are some advantages to taking out a payday loan – a small, emergency loan to be paid back on your next paycheck. They are quick and work even for those wiith bad credit, with many companies offering a payday loan on the same day of applying. These benefits come at a steep cost, the high repayment rates. These small, emergency loans should only be taken as a last resort. We'll hammer the point home – always look for alternatives to payday loans if you can.
We have compiled a list of the best online payday loan companies for those times when a real emergency hits, and your bad credit prevents you from taking an emergency loan from elsewhere. To grade these payday lenders we scored them on how quick the loan was deposited into an account, and how much interest was added. We have also provided a guide on how to avoid the less scrupulous lenders and also payday loan alternatives for you to consider.
All the lenders we review are direct lenders that comply with all applicable state laws. Even so, again, we caution against using these services because they are expensive and carry the risk of trapping you in a cycle where you need to take out new loans to pay off your previous ones.
Each state regulates payday loans differently – some outright ban them. As such, depending on where you live, the costs vary widely. With this in mind, our pick for the top payday lender is Check Into Cash. It is the most broadly available lender, with stores and online loans available in 32 states. It offers a variety of payday loans, installment loans and lines of credit.
Best Online Payday Loan
Many payday lenders offer loans through online portals, including CashNetUSA. Getting a loan online offers some advantages over visiting a retail location: There are no lines and no travel, and you can get a loan if you live somewhere that doesn’t have payday loan locations nearby. With loans available in 28 states and rates that compare favorably with other payday lenders, CashNetUSA is a good place to consider.
Payday loan rates vary from state to state. In states like California and Alabama, where there are legal limits, CashNetUSA charges the maximum amount allowed. Some states, such as Wisconsin, have no limit on payday loan rates. The highest rate we saw CashNetUSA charge was $25 per $100 borrowed, which is standard, though other lenders charged as much as $30. The lowest amount we saw from CashNetUSA was $9 per $100 borrowed, which is one of the lowest amounts.
Applying online is easy, and you receive an approval decision quickly, sometimes in as little as five minutes. To apply, you need to be at least 18 years old and a U.S. citizen as well as have a verifiable source of income and a checking account.
In some states, CashNetUSA offers different products, including installment loans or lines of credit. Installment loans have high rates like payday loans but can be paid back over a longer period. Lines of credit are also expensive, but you only have to repay the amount you use.
- Read the full review: CashNetUSA
Best Payday Loan Overall
Check Into Cash is one of the most widespread payday lenders in the country, offering payday loans, installments loans and other financial services to customers in 32 states. Payday loans aren’t legal everywhere, and in some states, Check Into Cash may offer different services. Because it has the broadest service area, reasonable fees for a payday lender and an array of financial services, it is our pick for the best lender overall.
Keep in mind that even the best payday lender is still extremely expensive, and you should try to find other options before visiting one. Fees vary depending on state regulations. In some states, such as Oregon, you pay around $13 for every $100 you borrow. In other states, such as Texas and Wisconsin, Check Into Cash charges $25 for every $100 you borrow. This puts the lender at about the industry average for payday loan fees. It doesn’t appear to take advantage of states with less stringent payday lending laws like Utah. We didn’t see fees greater than $25, which, while expensive, isn’t the highest we saw in our research.
In some states, Check Into Cash only offers online loans. The application process is similar to an in-store loan, but it can take up to two business days to receive your cash. In-store loans give you immediate access to the money you need.
- Read the full review: Check into Cash
Best Cheap Payday Loan
Getting the best rate on a payday loan can be hard. In some states, most lenders charge the maximum they are legally allowed. RISE offers loans that are similar to payday loans but with longer terms and lower costs. Its installment loans cost significantly less than installment loans offered through payday lenders.
RISE operates in 17 states, and the maximum amount it lends, as well as rates and terms, vary from state to state. APRs range from 36% to 299%, which is high, but most payday loan APRs hover around the 500% range. The most expensive loan from RISE costs around $12 per $100 you borrow, which is on par with the lowest cost for a regular payday loan.
In addition to low costs relative to payday loans, RISE offers advantages to repeat customers. If you show a history of reliably making payments, any future loans you take out will have lower APRs.
RISE also offers tools to help you build your credit. You can sign up for Credit Score Plus, which lets you check your TransUnion score and sends you alerts when something impacts your credit. Having bad credit can close avenues to less costly loans, so having tools that help you improve your credit can help you avoid paying the expensive rates payday lenders charge.
- Read the full review: RISE
Best Lines of Credit Payday Loan
Instead of getting a payday loan, you can apply for a line of credit, a service Speedy Cash offers in select states. A line of credit differs from a payday or installment loan in that you only pay interest on the amount you use, not the total you’re eligible to borrow.
Like payday loans, the fees you pay on a line of credit vary from state to state – depending on the regulations in your state, you can end up paying as little as $13 or as much as $22 for every $100 you borrow. An advantage of a line of credit is you only draw the money you need and only pay back what you borrow, which gives you some flexibility.
- Read the Full Review: Speedy Cash
Best Storefront Payday Loan Lender
There are some advantages to going to a storefront location to get your payday loan, and Check ‘n Go is one of the best options for those situations. If you apply for a loan at a retail location, you get your money immediately. On the other hand, with an online loan you have to wait at least until the next day for the money to deposit.
Check ‘n Go has locations in 23 states and offers a variety of additional services, including check cashing, prepaid debit cards and installment loans. Fees vary from state to state. We saw some as high as $30 for each $100 borrowed and others as low as $10 per $100 borrowed.
- Read the Full Review: Check 'n Go
Why Trust Us
Top Ten Reviews has written about payday loans for 12 years. We also take great care to keep our eyes open for alternatives. Payday loans have high fees, but because the application process is quick, the lenders don’t run credit checks and these services have many locations, they fill a niche in the financial environment.
Though regulated at the state and federal level, there are still payday lenders that attempt to skirt the rules. Some are online-only lenders based in other countries. Other lenders work around state laws by operating out of Native American reservations. Be wary of brokers that offer to connect you with lending partners – this can result in a lot of calls and emails about offers.
We stuck with direct lenders who comply with state laws. A good way to tell if a lender follows the rules is if its website asks what state you live in before giving you a quote. If a lender says all loans have the same fee no matter where you live, that’s a tipoff you may be dealing with a less-reputable lender you should avoid. We didn’t include any of those lenders on our lineup.
How We Tested
Because every state regulates payday loans differently and each lender operates in different states, there’s no one-size-fits-all pricing. Some states have limits on how much a payday lender can charge, some have no limits and some have enough regulations in place that payday lenders don’t operate in them. This makes evaluating lenders on their rates difficult. With that in mind, we looked for the highest and lowest fee each lender charges. This gives a good baseline for how much you can expect to pay and how these lenders approach state regulations, especially in the states with no regulations. The fees we list apply to a $100 loan for a 14-day period. Many of these lenders offer additional products, including installment loans, lines of credit and check cashing. Installment loans are paid back bi-weekly or over several months. They are larger than payday loans but are often as expensive or more so. Over the course of paying back an installment loan, you often pay double the amount you borrowed. Some of the lenders we looked at, including RISE and LendUp, offer installment loans that have lower rates than standard payday loans.
We also looked at the number of states each lender serves. In most of the Northeast and throughout the South, payday loans aren’t legal.
Many lenders offer online loans in addition to having retail locations. An online lender has some advantages over a retail location. For example, you can apply from your home, and online loans are more widely available. The drawback is you have to wait one to two business days for your funds to deposit. If you get a loan from a physical location, you get your money immediately.
Payday Loan Rates
Often, you see APRs listed for payday loans as high as 600%. Because you pay the loan back in two weeks to a month, the APR serves mostly as a gauge of how expensive the loan is. Payday loans charge a finance fee, which ranges from $10 to $30 for each $100 you borrow. We chose to include this fee rather than APRs to give you a better idea of how much you’ll end up paying if you decide to get a payday loan.
What Are the Best Online Payday Loans?
The best online payday lenders make it convenient to apply from your phone or computer. Applying online saves you the trouble of finding a location and any embarrassment you might feel about requesting a payday loan in person. One drawback of online payday loans is you don’t get your money immediately – you usually have to wait one or two business days for the money to deposit in your account. So if you apply on the weekend, you won’t get the money until the following Monday. If you need immediate cash, you’re better off going to a lender with a physical location.
Online payday lenders have similar application requirements to lenders with physical branches. You provide personal information and your bank’s routing number. Remember that once the loan comes due, the lender withdraws the funds you owe from your account, leaving you vulnerable to overdraft fees.
The best online lenders comply with all state laws regulating payday loan fees, terms and rollover restrictions. Most websites require you to enter your ZIP code or select your state before they display your loan options with their terms and rates. Because of the patchwork nature of payday loan regulation, some lenders don’t operate in every state. Other lenders only offer certain types of loans in some states, not their full range of options.
As we reviewed online payday lenders, we noticed some companies skirt laws by setting up offshore or on tribal land. We didn’t review those lenders, and they often charge higher fees than others. Make sure the site asks for your ZIP code or state before you apply.
Alternatives to Payday Loans
You often hear that payday loans are something people turn to when there’s an emergency expense like a car accident or medical emergency. That’s not necessarily true. In a study on payday loans, the Pew Charitable Trust found that 69 percent are used to pay for recurring expenses like utilities, food or other bills. The average borrower uses eight loans a year, which last about 18 days each.
If you find yourself in a situation where you're considering a payday loan, explore alternatives first. If you have emergency expenses, consider using a credit card or finding a cosigner for a personal loan. These have lower interest rates and don’t put you in as much of a bind as payday loans. The balloon payment when the term of your payday loan expires can leave you short when your next paycheck arrives, which can force you into taking out another to pay for your expenses. In cases like this, making minimum payments on a credit card, while not ideal, is a better option than being caught in a payday loan debt trap.
Look for a credit union – a non-profit alternative to a bank. Many have begun to offer payday alternative loans, which are like payday loans in that they are for smaller dollar amounts, but they don’t have high fees.
We spoke to John Fairbanks at the National Credit Union Administration who told us that “Many credit unions have their own programs to provide small-dollar, short-term loans, either in lieu of payday loans or as a means of helping members get rid of existing payday loans so they can begin to rehabilitate their credit.” Payday alternative loans are available through federal credit unions and have applications fees that are capped at $20 for the entire amount of the loan. State credit unions also offer similar short-term, small-dollar loans.
Do Payday Loans Affect Your Credit Score?
Unlike most loans, which require a minimum credit score for acceptance, payday loans don’t have any credit requirements. To apply, you need to present proof of income and a checking account, but the lender doesn’t look at your FICO score. Likewise, records of timely payments don’t appear on your credit report. So, a payday loan can’t help you build credit, and applying for one doesn’t impact it, either.
However, there are ways these loans can affect your credit, especially if you can’t keep up with your payments. Part of getting a payday loan involves leaving a post-dated check, or giving the lender access to your checking account if you apply online. When the loan comes due, the lender deposits the check or withdraws what you owe. If you don’t have enough in your account to cover the amount you owe, you could bounce a check or overdraw your account.
Bounced check and overdrafts don’t adversely affect your credit score, but they can prompt lenders to send your loans to collection agencies. Debt collection agencies tend to report unpaid debts to credit reporting agencies. Collections agencies can also sue you over unpaid debt, which can also lead to those debts appearing on your credit reports.
Some short-term payday loan alternatives offered by credit unions and lenders like Oportun do report to credit agencies. If one of the reasons you’re using payday loans is because you have poor credit and can’t get approved elsewhere, these options might be worth looking at.
Refunds Available After FTC Lawsuit Against Payday Lender
In September, the FTC announced a $505 million refund to payday loan customers as a result of a suit against AMG Services, which ran multiple payday lending companies, including 500FastCash, Advantage Cash Services, Ameriloan, OneClickCash, Star Cash Processing, UnitedCashLoans and USFastCash.
If you borrowed from any of these companies between January 2008 and January 2013, you should have received a refund check in the mail. Over 1.1 million people are eligible for refunds. You can learn more by visiting the FTC’s page about the refunds.
The FTC sued AMG for deceptive lending practices. Instead of charging a one-time finance fee as it claimed it would, AMG made illegal withdrawals from people’s accounts and charged hidden fees. All told, these loans had effective interest rates from 700% to 1,000% – far beyond the legal limits for a payday loan.
This case highlights some of the ways unscrupulous lenders take advantage of borrowers. The terms were deliberately misleading and required borrowers to explicitly opt out of renewing the loan. You should avoid a loan that auto renews. AMG also took steps to avoid explaining this process to borrowers when they applied for loans.
Further, AMG Services attempted to sidestep regulation by incorporating on tribal land. This has become a common trick to avoid state regulations. None of the lenders we reviewed use this loophole, and we would recommend avoiding any that do.
Installment Loans Can Carry Extra Costs
A payday loan is typically for a small amount, usually a couple hundred dollars at most, with a high interest rate. If you need a larger amount of money, up to several thousand dollars, an installment loan is an option worth looking into.
Installment loans differ from payday loans by having longer terms and regular payments. With a payday loan, the entire amount comes due at the end of a set period, usually two weeks to a month. Installment loans have high rates – not as high as payday loans but higher than a personal loan or a credit card. Also, like payday loans, there’s no credit check or collateral required to apply.
The Pew Charitable Trust recently published a report on installment loans and how state laws impact them. Like payday loans, each state regulates installment loans differently, though installment loans tend to be less strictly regulated than payday loans.
Pew found that installment loans are about three or four times less expensive than payday or title loans. Often, an installment loan will have payments that are 5 percent or less of the borrower’s monthly income.
This report identified two ways lenders add costs onto installment loans. The first is by adding credit insurance, which can cost up to a third of the loan amount. This is financed into the loans, increasing your monthly payments. Credit insurance ensures the lender is paid if you become ill, injured or otherwise unable to make payments.
Another way lenders increase the amount you pay on installment loans is by adding origination or acquisition fees. This fee is usually a flat dollar amount added at the beginning of the loan. The Pew study saw origination fees that range from 1 to 46 percent of the loan amount. Origination fees vary from state to state, but lenders charge the maximum allowable in each state.
When getting an installment loan, keep in mind that credit insurance and upfront fees affect the actual APR you pay, making it higher than the APR the lender quotes you.
What Are Title Loans?
A title loan is another type of loan that doesn’t require good credit for approval. Like payday and installment loans, they also have high rates. A title loan is secured, meaning you have to put up collateral to get the funds – in this case, the title to your car.
With a title loan, the amount you qualify for depends on an assessment of your car’s value. Loans range from a few hundred dollars to $10,000. A standard title loan is due in full after 30 days. This includes the finance charge, which can be as much as $125 for a $500 loan – that means you’ll pay $625 total when the loan is due. According to the Pew Charitable Trust, the average APR on title loans is around 300%.
Title loans are very risky. Because you use your vehicle as collateral, it can be taken by the lender if you don’t make your payment or come to an alternative arrangement. Often, that means rolling over your loan. The Consumer Financial Protection Bureau studied title loans and found that over 20 percent end in a car being repossessed. Only 12 percent of borrowers pay off the loan without having to renew. More than a third of borrowers end up taking out more than seven loans, meaning they have to pay nearly as much in fees as they borrowed in the first place.
We caution you to avoid title loans. They are expensive and risky and can result in you having to constantly roll the loans over or have your car taken. The loans don’t affect your credit, but getting your car repossessed can stay on a report for up to seven years.
Does Where I Live Affect My Payday Loan?
Every state regulates payday loans differently. In some states, including Georgia, they are banned outright. In other states, interest rates are capped to such an extent that they are essentially banned. In total, 18 states ban payday loans. Other states, such as Oregon, have some restrictions in place, but payday lenders still operate in them. Payday loans come with few restrictions in 32 states. Any restrictions in these states tend to focus on the maximum number of loans someone can take out and not on rates.
State laws do change though. In 2016, South Dakota passed a ballot initiative that capped interest rates on payday loans at 36% where there had previously been no restrictions. In 2018, Colorado passed a similar law, also limiting payday loans to rates of 36%.
Beware of lenders that try to skirt these laws. For example, many set up on Native American tribal land to get around state laws. We also noticed some online lenders are based outside the U.S. and offer uniformly high rates no matter where you live.
A good rule of thumb is to see if a payday lender’s website lists individual states. If there’s a flat rate no matter where you live, stay away.
Payday Loan Requirements
Payday loans have fewer requirements than other types of loans, with the following being the most basic:
- Meet the minimum age requirement (18 in most states)
- Have an open and valid checking account
- Provide proof of income (usually a pay stub, but other documents may be accepted)
- Have a valid phone number
If you apply online, the requirements may be slightly different. For example, you need to provide a checking account and a Social Security number. Some payday lenders will not lend to you if you’re currently filing for bankruptcy.
There’s no credit check or any minimum credit score requirement. Unlike other types of loans, the rates are flat and don’t change based on your income or other factors. The biggest factor in determining how much you pay in fees on your payday loan is the state you live in.
How quickly you receive your money depends on if you apply online or in person. If you apply at a store, you get your money right then and there. If you apply online, you have to wait between one and two business days to get your money. As such, if you need money immediately, it may be better to apply at a store.
Should You Roll Over Your Payday Loan?
Payday loans are meant to give you access to money short term, until you get your next paycheck. Reasons for getting a payday loan range from unexpected expenses to working irregular hours at your job. But more often than you’d think, these loans don’t get paid off after two weeks and need to be rolled over into another loan. If you can, avoid doing this – it can result in you being stuck in a cycle of debt, and you’ll end up paying much more in fees than the amount you borrowed.
According to the CFB, more than 80 percent of payday loans are rolled over. When you roll over a loan, you pay the finance charge and have another two weeks to pay back the initial amount. For example, if you take out $200 with a $40 charge, you’d normally pay $240 at the end of a two-week period. If you can’t pay it all back, you pay the $40 and rollover the $200 while also taking on another $40 finance charge. If you pay that loan back, you end up paying a total of $280.
You can see how rolling over loans can lead to you paying much more than you initially borrowed. If you’re considering a payday loan but are worried about being able to pay it back, look into an installment loan. These tend to have smaller payments spread out over a longer time period. You can also work on improving your credit to become eligible for personal loans or credit cards, which have lower rates and monthly minimum payments.
Are Paycheck Advances an Option for Avoiding Payday Loans?
One of the primary reasons people turn to payday loans is an inability to meet their expenses. This can be because of irregular pay schedules or unexpected expenses. Some employers are partnering with startup companies to provide their employees with advances on their paychecks or with loans that are less costly than payday loans.
PayActiv is one such company, and it has partnered with a variety of employers, including Walmart. It integrates with the employer’s payroll, and employees can withdraw money directly into their checking accounts for a $5 fee. Earnin, which used to be known as Activehours, is a similar program. If your employer uses it, you can withdraw between $100 and $500 per pay period. There are no fees for using Earnin, but there is an option to tip.
Several companies, including TrueConnect and HoneyBee, offer cash advance loans to employees. These can be for as much as $2,500, and they have repayment periods of up to three months. You pay a fee of around 5%, up to $50. These loans also have the advantage of being reported to credit bureaus, so they can help you build your credit score. Payday loans aren’t reported to the credit bureaus.
If your employer works with any of these companies, it’s a good option to take advantage of their services since they are less expensive in the long term than a payday loan. Still, if you find yourself taking advantage of these services regularly or your employer doesn’t offer them, you may want to look at your finances, make a budget or look for additional ways to earn income.
Can You Get a Payday Loan Through a Bank?
Generally, banks have shied away from offering small dollar loans – a personal loan through a bank usually must be for at least $1,000. According to a Fed survey, 40 percent of Americans can’t come up with $400 in an emergency, which is one of the niches payday loans fill.
In May 2018, the Office of the Comptroller of the Currency, which regulates large federal banks, issued a rule permitting those banks to offer loans for smaller dollar amounts. Borrowers also have longer to repay, with at least 45-day terms. These loans are expected to have lower interest rates than payday loans, which can often hit the triple digits.
Banks have more leeway with low credit scores, another factor that drives borrowers toward payday loans. Banks can now consider things like how long a borrower has been with a bank and how frequently they make deposits as it makes lending decisions.
U.S. Bank is the first to offer these small-dollar loans. Its Simple Loan program provides loans ranging from $100 to $1,000 to customers with a checking account through it. Simple Loan has few requirements: You must be over 18, have had a U.S. Bank checking account for at least six months and have made at least three direct deposits into it. There’s no credit check required for this loan.
Simple Loan shares high costs with payday loans – you pay $12 per $100 borrowed if you make automatic payments, $15 per $100 if you make manual payments. You repay in three monthly installments. This makes the loan less expensive than a payday loan, though it is still costly, with rates hovering around 70%.
What Are Payday Loans Used For & Who Takes Them Out?
The most common refrain about payday loans is that they’re used for emergency expenses. While this is the case for some people, a Pew study shows that the vast majority of people use them for recurring expenses.
According to this study 69 percent of all payday loan borrowers use the money for regular expenses like credit cards and utilities. Only about 16 percent of borrowers use the loans for unexpected expenses like car repairs or medical emergencies.
Demographically, most payday loan borrowers are white women between 25 and 44 years old. Also, people are more likely to use payday loans if they have an income of less than $40,000 and no college degree.
The average borrower uses eight loans a year, usually lasting for 18 days each, meaning they have payday loans at least five months out of the year. This runs counter to the idea that these loans are for one-time emergency expenses. Many states have restrictions on how many times a loan can be rolled over and some require cooling off periods.
Combined, 12 million Americans take out payday loans per year, paying a total of $9 billion in fees. Auto title loans, often offered by the same companies, are used by 2.5 million people and account for $3 billion in fees.
What Else Do Payday Lenders Offer?
Payday lenders offer a variety of services beyond their industry’s namesake. Because state laws vary widely, each lender may offer different services in one state than it does in another. That said, payday lenders offer other loans, including title loans, installment loans and lines of credit, as well as other financial services like check cashing.
Title loans and installment loans are for larger amounts money and have longer repayment terms, but they have the same high rates as payday loans. For a title loan, you must sign over the title to your car, which can be repossessed if you fail to pay back the money. A line of credit is another option offered by some lenders, and it is a more flexible choice. You can take out as much as you need but only pay interest on the money you use. But again, the interest rates are high.
Most payday lenders let you cash checks through them. You can cash most types of checks, including payroll, tax return and two-party checks. As with all products offered by payday lenders, there are fees, which they tend to be less forthcoming about than they are about fees for the actual loans. They typically charge you a percentage of the check amount – as high as 5% of the total, depending on the source of the check. If you need to cash a check, you can do so at many retail or grocery stores, which usually only charge a few dollars.
What Is the Statute of Limitations on Payday Loans?
The statute of limitations is the amount of time you’re legally liable for your debt. This varies from state to state, and in some cases, it applies to payday loans differently than other types of debt. Typically, the statute of limitations begins when your payments become delinquent, not when you sign the initial contract.
Don’t take your debts having a statute of limitations as an invitation to default. It's just a time limit on how long a lender or collection agency has to collect your debt. This can range from six to 10 years. If you do default, the lender can still attempt to collect or sell to a collection agency.
One drawback to payday loans is you give the lender access to your bank account. If you do default, the lender will make automatic withdrawals from your bank, which can lead to overdraft fees and affect your credit.
If you do become delinquent on your payday loan and it does go to collection, it's important to know your rights. Despite any threats, you cannot go to jail for unpaid debt, but the lender or collection agency can sue you. Just because your debt has an ostensible expiration date doesn’t mean you can wait it out. If you’re having trouble meet your payments, contact the lender to see if you can work out a payment plan or alternative arrangement.
Can You Consolidate Payday Loans?
If you find yourself having to roll over your payday loans or you start getting overdraft fees from the lender’s attempts to withdraw payments from your account, consolidation may be an option.
Debt consolidation means one of two things. First, a consolidation loan lets you pay off everything, replacing it with a new loan. However, one of the reasons people turn to payday loans is a lack of credit, which makes being approved for a consolidation loan unlikely. The second consolidation option involves signing up for a program with a company that negotiates on your behalf.
You also may be able to work with the lender to create a repayment plan. If your lender belongs to the Community Financial Services Association of America, you can amend your loan agreement to create an extended repayment plan.
It may be better to find a family member willing to co-sign a personal loan. A personal loan typically has lower rates and better terms. Also, you can make monthly payments and don’t have to worry about the payday lender triggering overdraft fees. However, be aware that co-signers put their credit at risk and are held liable if you miss payments.
Is Finding a Co-Signer a Good Alternative to a Payday Loan?
Payday and installment loans tend to be fall back options when your credit isn’t high enough to get approved for a personal loan. However, you may consider finding a co-signer to apply for a bank loan with you. If your co-signer has good credit, it’s likely you’ll get approved and won’t need to take out a more expensive payday loan.
There are also other benefits to getting a loan with a co-signer. For example, you can improve your credit by making timely payments. By building credit, you become eligible to apply for loans by yourself in the future. Another benefit is you’ll be eligible for lower rates than you would have with a payday loan.
However, there are drawbacks to getting a co-signer. The primary drawback is your co-signer is also responsible for the loan. This could leave them vulnerable if you fall behind – they could be contacted by collections agencies, and their credit could be affected. Since your co-signer may be liable if you miss payments, it's important to stay on top of your payments and stay in touch with your co-signer if you run into trouble.
Simple Ways to Build Credit
You should avoid payday loans as much as possible and seek alternatives before applying for one. If you need a payday loan because bad credit is keeping your from getting approved for credit cards or other loans, take a look at these tips for improving your credit:
Look for Errors: According to an FTC study, around 25 percent of credit reports have errors that make a measurable impact on credit scores. By law, you’re allowed to dispute these errors and have them corrected. Common errors include wrong identifying information, closed accounts reported as open and debts being listed more than once. The CFPB has a list of common credit report errors that’s also helpful. You’re entitled to one free credit report from each bureau once a year. So get a report, comb through it for errors and dispute them – you may see a positive effect on your credit score.
Stay Under Your Limit: Maxed out credit cards can have a dramatic effect on your credit score. Try to keep your credit card debt to around 30 percent of you balance. To keep your balances low, make multiple small payments each month, get your limit raised and make higher payments on your highest balance card first. Credit card companies report each month, so it may take some time to see the effects on your score.
Stay Current on Payments: Payment history is another big component of your credit score. Stay on top of your monthly payments. If you’re behind on an account, call your creditor and work on an arrangement to get current and see if it will rescind any reported delinquencies.
CFPB Ends Payday Loan Rules
The Consumer Financial Protection Bureau recently pulled back on implementing a rule that required strict standards on assessing a borrower’s ability to repay a payday loan. This rule also placed greater restrictions on the number of loans someone could roll over. The rule was drafted in 2016 and was expected to take effect in 2018. Regulations limiting the number of times lenders can attempt to withdraw money from a borrower’s account will remain in place. There will be a 90-day period for public comment before these changes become final.
Speaking to NPR, agency chief Kathy Kraninger says “pulling back the rule would encourage competition in the payday lending industry and help improve credit options for borrowers in need.” Critics argue that refusing to implement the rule leaves borrowers susceptible to debt traps. According to the CFPB’s own data, more than half of all payday loans are part of a sequence of as many as 10 loans.
Payday loans are illegal in 20 states, and the states they are legal in all have different regulations governing the loans. The CFPB rule would have affected the industry as a whole, so the current system of state-by-state regulations remains in effect. Some states have restrictions on the top rate a payday lender can charge and how many times a loan can be extended, but other states have few restrictions in place. Recently, South Dakota and Colorado implemented laws that sharply curbed the rates lenders can offer, effectively banning payday loans in those states.