Why You Shouldn’t Take Out Payday Loans

payday loansWhen unexpected expenses come out of the blue and you’re not sure how best to pay, you may be tempted to take out a payday loan to get a hold of the money straight away and get the payment wrapped up. Here at Money Crashers, we are strongly against payday loans. If you’re not familiar with how they work, the basic idea is that you are temporarily loaned the money until your next payday. In most cases, you apply for the loan and are approved very quickly (often within one or two hours), and the money can usually be deposited into your bank account that same day. Sounds good, right? Think again. There are some pretty big downsides to payday loans that make them a very risky and unattractive prospect. Here are some of the reasons why we’re so set against payday loans:

The interest is almost criminal. Payday loans may well be a convenient way to get your hands on cash in an emergency, but you really pay the price for this. The interest on payday loans is exceptionally high and this isn’t always made obvious when you initially take out the loan. Because of this, it can come as a big shock that hasn’t been budgeted for. After all, the reason that payday loans are taken out in the first place is because the recipient is short of money, so having big interest on top of the basic loan can be a devastating blow in terms of being able to repay the money.

Typically, you’re charged something in the region of $15-$25 for every $100 that you borrow. For a $500 payday loan, you’re effectively charged as much as $125 just to borrow the money for a month or less. The loan balance can be carried over to another month but in the meantime, the debt is racking up a lot of interest that increases the balance even further. The amount that you ultimately owe can potentially double if you can’t pay the money back in full at the first time of asking. If you have to continuously “roll over” to another month, you could find that the interest becomes more than the original loan.

The loan period is short. To avoid getting into deep trouble, a payday loan needs to be repaid by your next payday. For most payday loans, you have a maximum time period of around 30 days (sometimes less) before you’re deemed to have “missed” the first repayment. At this point, you’re hit with big interest charges that significantly ramp up the amount that you owe. On top of this, there may also be fees for “rolling over” the loan to another month.

Alternative options

Even if the situation is an absolute emergency, there are other alternatives to payday loans. For example, ask your bank for an authorized overdraft, charge the unexpected expense(s) to a credit card, look to online peer-to-peer lenders such as Lending Club, or simply scrounge up some money by doing odd jobs for neighbors or selling a bunch of stuff. Whatever the problem, payday loans are not the best solution and can cause even bigger worries in the future.


As you can see from this post, I’m no fan of payday loans. For me, they’re little more than a good way for loan companies to rip off vulnerable people who are in financial trouble. Taking out a payday loan might seem like a good way to pay something off in full so that you’re not incurring interest but in reality, the interest on payday loans will blow this out of the water. Once you get into trouble with a payday loan, it can be difficult to get out of the mess. If you do go ahead and take out a payday loan, be sure that you’ll have the means to meet the repayment without having to get another loan to cover your back. We know the the other side of this argument that payday loans serve to help those people with bad credit or people in dire financial situation, but it’s simply predatory lending. They prey on the weak to make and capitalize off of that TREMENDOUSLY. Our stance is that they should be avoided at all costs, and there are plenty of other options available.

What are your thoughts on payday loans? Have you ever taken one out, or would you do so in the future?

(photo credit: taberandrew)

  • Karmella

    I’m torn on this issue – I am not a fan, but I don’t think it can all be blamed on the companies.

    I like that you included some alternatives in here, the coverage I’ve seen of these loans has often omitted that aspect.

  • Missy

    I don’t think they’re entirely evil as many only have this option available to them. If not abused, it can be helpful.

    Yes! many who use payday loans are people who can barely afford to eat, but there’s also another set of people who use them once or twice a year for true emergencies, and pay them off within the 2 week period.

    It’s when you know you don’t have the money to pay the loan off in full at maturity, that it becomes problematic. And can get some in BIG trouble, as then they have to keep rolling it over.

    But this can be said of homeowners and credit card holders as well. Some just don’t know when certain things are out of their reach, but they plunge ahead anyway and purchase things they most likely shouldn’t, and make things awfully hard on themselves. Financially.

    I don’t think payday loans in general are evil. They just have to be used in a smart fashion. As in very infrequently.

  • Jason

    I think that payday loans aren’t good. I do think that these types of loans have many evils with them. I don’t think these loans should been allowed to charge the kind of rates they have been charging. It would be reasonable with a small fee. But nowadays with these kinds of loans and those jacked up home loans the economy is screwed up. I guess white collar criminals can do what they want and get away with it.

  • http://www.paydayau.com.au Stuart Thomas

    i agree with the karmela instead the companies shouldn’t we give some thought to the people that use them?

  • http://lizloans.com/ Liz PaydayLoans

    Yes, when it comes to quick and easy access to loans a payday loans is the best of the best candidate for it however the downsides that make this payday loan sucks is alarming. You will be getting a small amount of money from this loan yet you will be paying a high interest from that loan mount you have borrowed which make it sound bad.

  • http://www.paydaybank.co.uk/ payday loan for bed credit

    Payday Loan is the most convenient option for getting small financial help quickly. Pay day loans may be a life-line for many individuals and can possibly be used for anything from expenses, direct debits, unforeseen fees or special events.

  • Info

    Your comment about asking your bank for an authorized overdraft or charging the unexpected expense(s) to a credit card are not realistic for the people who are truly in a bind. They don’t have good credit, and many don’t even have bank accounts. So, this does not make sense. “Simply scrounge up some money by doing odd jobs for neighbors or selling a bunch of stuff.” Yes, this is a good idea if you have the time to do this prior to paying whatever emergency expense you are talking about. But, again, the people who need payday loans or are in a position that they need a payday loan probably don’t have the time to do these things.

    Payday loans should ONLY be taken out if a borrower is confident that they can pay back the money on time so they don’t fall into a debt trap. In the meantime, they should aggressively pursue your ideas, cutting expenses, seeking a credit counselor, etc.