Why are payday loans bad?

Quick Answer Payday loans are considered bad because they often have high interest rates and fees. It is common for borrowers to struggle with repayment and get trapped in a cycle of debt. They are designed for short-term emergencies, but the costs can quickly add up, making it difficult to repay.

Kevin Johnson profile picture
Kevin Johnson Answer updated on Jul 17, 2023

Fact checked by Doreen Dumesle

Payday loans receive a lot of negative criticism and are harshly judged because of their, often, exorbitant cost.

While this disfavor isn't unwarranted, payday loans do still serve as a useful financial tool for those with limited options when managed properly. Let's examine the ugly truths and common misconceptions about payday loans.

At first glance, a payday loan may seem like a great option when you have poor credit and need cash fast for a short-term emergency. Because payday loans don't require credit checks and are easy to get, they are an attractive option for those with subpar credit history. But as the saying goes, if something seems too good to be true, it probably is — and, in most cases, this is the unfortunate truth when it comes to payday loans.

Learn: Are payday loans ethical?

So, why exactly do payday loans get such a bad rap? Well, their main pain point is their relatively high APR and fees. Most payday loans have an APR of around 261% to 782% — that's considerably high when compared to the average 24% APR of a standard credit card.[1]

That 261% to 782 APR means that, if you took out a $500 payday loan, you'd end up having to pay back between $550 to $649 in just two weeks (the usual term of a payday loan), and that's NOT including any other additional fees or charges your lender might assess.

Learn: Do banks offer payday loans?

If you're already tight on cash, this high price can make it hard for you to repay your payday loan and stay on top of your other financial responsibilities. In fact, almost two-thirds of payday loan borrowers have to renew their payday loan (meaning they take out another loan to help cover their existing loan) — and this is the catalyst for the perpetual debt cycle that is commonly associated with payday loans.

The short term of these loans, coupled with their high cost and borrowers' inability to adjust their spending to make their repayment according to schedule, results in 20% of borrowers defaulting on their payday loan at some point.[2]

Learn: What happens if you don't pay back a payday loan?

As you can see, all of this gives payday loans quite a reputation and takes away a bit of their allure. Though — with proper understanding of their terms, cost, and your finances — payday loans can be a harmless short-term financial solution. If you opt to go with a payday loan for your financial needs, just be sure to:

  • Understand how much your lender will require you to repay by the end of your loan term (typically two weeks).
  • Adjust your spending so you can comfortably make your repayment by your loan's maturity date.
  • Don't borrow more than you need.
  • And, most importantly, payback your loan on-time.

If a payday loan sounds a little too rich for your blood 🎲, and you're looking for a healthier financial option, I encourage you to consider other alternative lending options like installment loans or car title loans which offer more manageable repayment plans and lower rates. 👍

  1. What Is The Average Credit Card Interest Rate This Week? July 10, 2023 ↩︎

  2. CFPB Finds Four Out Of Five Payday Loans Are Rolled Over Or Renewed ↩︎

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