Payday loans have long been a controversial financial product, offering instant cash but often at a steep cost. While these short-term solutions can seem like a lifeline for those facing unexpected expenses or financial emergencies, their high interest rates and fees can trap borrowers in cycles of debt.
Fortunately, there are other, safer, ways to get instant loans online – or alternatives. Let’s dive into some of your options.
What is a payday loan?
A payday loan is a small, short-term loan designed to help you get through a financial pinch. Borrowers typically take out these loans to cover expenses until their next paycheck rolls in. They’re often a fast solution and some lenders won’t even run credit checks.
The catch? Payday loans come with high interest rates and must be paid back quickly — usually within two weeks or by your next payday – hence, the coined name “payday” loans.
Many states have banned payday lending through criminal and civil usury laws. Payday loans are known for extremely high APRs, up to 400% or more! These types of loans are not based on the ability of a person to pay them back; therefore, they often trap low-income individuals into a cycle of debt.
If payday loans aren’t legal in your state or offered by a business that’s not licensed in your state, the funding could be void and the lender may not have the right to require you to repay. All in all payday loans can be predatory financing options and it’s recommended to seek out safer alternatives (more on that below).
Recommended: Ways to Quickly Get Emergency Loans When You Need It
What states allow and prohibit payday loans?
When it comes to payday loans, not all states are on the same page. High fees and potential debt traps have led many lawmakers to crack down. Laws are subject to change at any time, so make sure to double-check with your local state authority for the most accurate and up to date information.
States that allow payday loans:
These states allow payday loans, but often with regulations in place to protect consumers from excessive fees: Alabama, Alaska, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, Wyoming.
States that prohibit payday loans:
On the flip side, some states have banned payday loans altogether or set strict interest rate caps: Arizona, Arkansas, the District of Columbia, Georgia, Massachusetts, Maryland, New Jersey, New York, North Carolina, Pennsylvania, West Virginia, and Vermont.
5 Alternatives to payday loans
Payday loans can be a slippery slope, but alternatives like those available through MoneyLion could be safer and more affordable.
Earned wage access
Earned wage access programs allow you to access a portion of your earned wages before payday. It’s a great alternative if you need money fast but don’t want to fall into the payday loan trap.
Instacash®, an earned wage access product from MoneyLion, is a payday loan alternative that lets you access up to $500 of your paycheck before you get paid — without interest or mandatory fees. You repay the balance when your paycheck hits, making it a much more affordable and responsible way to cover short-term needs.
And MoneyLion can help you consider other earned wage access options below:
Credit builder loan
Another great option is a credit builder loan. These loans are designed to help you build or repair your credit. With a MoneyLion CB+ paid membership, you get the benefit of having access to a credit builder loan. It works by borrowing a small amount for regular payments and getting the loan proceeds after you’ve paid it off. It’s a great way to build credit over time through responsible practices.
Credit card
Using a credit card responsibly can be a great alternative to payday loans. If you’re in a pinch, putting an expense on a credit card and paying it off as soon as possible could save you from the sky-high fees payday loan charges.
MoneyLion can help you explore a wide variety of credit card options tailored to different needs and preferences.
Borrow from family or friends
This might not be your favorite option, but borrowing from someone you trust can save you a ton of money in interest and fees. Just make sure to pay them back, unless you want awkward Thanksgiving dinners for the rest of your life.
Look for side hustles
Need extra cash? Side hustles like freelancing, driving for Uber, or selling stuff online can help you avoid the payday loan pitfall. Plus, they could turn into steady streams of income. Check out our blog on side hustles for more ideas.
Common features of payday loans
Let’s break down the key features that make this funding product stand out (for better or worse).
- Short-term loans: Payday loans are meant to be repaid quickly, usually within 14 days. Think of them as financial band-aids — temporary fixes for immediate problems.
- High interest rates: Brace yourself — payday loans can have interest rates as high as 400% APR. That’s not a typo. For a $500 loan, you could end up paying back $575 or more in just two weeks.
- Easy and quick application: No credit check? No problem. Payday loans are notorious for their super-simple application processes. All you typically need is a bank account, ID, and proof of income.
- Small loan amounts: Payday loans are usually for small amounts, ranging from $100 to $1,000, depending on your state laws.
- Repayment in full: Payday loans are designed to be paid back in one lump sum, often leading to stress when your entire paycheck is already spoken for before it even hits your account.
- Rolling over: Can’t pay it back in time? You can roll the loan over for an additional fee. But beware: rolling over can trap you in a vicious cycle of debt, adding even more fees.
- Flexible use: Unlike some loans, payday loans don’t come with strings attached. You can use the money for whatever you need, from groceries to car repairs.
How much does a payday loan cost?
Payday loans are convenient, but they don’t come cheap. The fees can add up quickly, making these loans much more expensive than they initially appear.
Let’s say you take out a $500 payday loan with a 15% fee. You’d owe $575 in just two weeks. Borrow $1,000? You’re looking at $1,150 in repayments. And if you can’t pay it back on time? More fees get tacked on, and before you know it, you’re in deeper than you expected.
Finding a long-term solution
Payday loans might seem like a quick solution when you’re short on cash, but they come with high costs and risks. Before you take the plunge, consider alternatives like Instacash, credit builder loans, or asking a family member for help. The goal? Finding a solution that helps you long-term, not just until your next paycheck.
FAQs
Why is it called a payday loan?
It’s called a payday loan because you’re borrowing against your next paycheck. The idea is that you’ll repay the loan with your upcoming earnings, usually within two weeks.
Are payday loans bad?
Payday loans aren’t inherently “bad,” but they can lead to a cycle of debt from high interest rates and fees and short repayment terms. They’re not always recommended and it may be best to explore alternatives if possible.
Why are payday loans so expensive?
Payday loans come with high fees and interest rates because they’re short-term, high-risk loans for the entities doing the lending. No credit checks mean that lenders pass that risk onto you in the form of higher costs.
