Should I get a payday loan?

January 9, 2021

Payday loan promises a quick financial fix that can turn into long-term pain. 

Money bills folded and placed on a table

If you’re in a bind and need money, a payday loan may seem like your only option. Some online lenders advertise their products to bad or fair credit borrowers. These lenders may approve loan applicants by charging exuberant fees and interest rates. 

In particular, payday loans are not for everyone. The payment plans and terms can be painful to repay. Payday loans often hide their terms and rates in footnotes and long contract pages. If you’re not careful, it could end up costing you much more than you expected. Before you apply for one, it’s important to know what you’ll get and how much you are expected to pay in return. 

How payday loans work

Lenders hold the checks until the borrower’s next payday when loans and the finance charge must be paid in one lump sum

To pay a loan, borrowers can redeem the check by paying the loan with cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period. 

According to the Consumer Financial Protection Bureau, a typical two-week payday loan carries a fee of $10 to $30 for every $100 borrowed. The rates vary depending on state regulations. Payday loans range in size from $100 to $1,000, depending on state legal maximums. The average loan term is about two weeks.

For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Rates are higher in states that do not cap the maximum cost.

How to calculate payday loan fees

Calculating the lifetime cost of a payday loan can be complex. The average APR of payday loans varies by state. A state with more protections caps the average APRs. 

Borrowers take out another loan within two weeks of repaying a previous one. Three-fourths of all payday loans are taken out by borrowers who have taken out 11 or more loans in a year. A cycle then begins–what started as a $200 short-term loan can balloon into over $1,000 or more to repay. 

A $500 loan with a 360% APR will incur $1,432.44 in interest if paid back within 12 months. Keep in mind the interest charge is paid in addition to the original amount borrowed — so the $500 loan will cost almost $2,000 by the time it’s paid back in a year. 

Alternatives to Payday Loans

Despite its unethical lending practices, the payday loan industry exists for a few reasons. One of them is to provide credit to millions of Americans who don’t have access to other forms of short term loans. They can’t just tap into a bank line of credit or put unexpected expenses on the credit card. 

Installment loans 

These loans are a less costly and safer alternative to payday loans. They are also short-term, like payday loans, but take payments in smaller installments. Smaller installments are more manageable for borrowers over time. 

In an analysis of 296 installment loan contracts, Pew found that installment loans take up 5% or less of a borrower’s monthly income. They are much less than payday loans and have significantly smaller origination fees. However, that doesn’t mean installment loans come without risk. 

Lenders often offer installment loans with unnecessary add-ons, such as credit insurance. These extraneous add-ons can increase the total cost of an installment loan by more than a third.   

Money pool app

Community savings have existed for a long time. Rotating Savings and Credit Association (ROSCA) that brings communities to overcome financial challenges together. ROSCA happens via set contributions and withdrawals to and from a common fund. Rotating Credit and Savings Associations are most common in developing economies

In a ROSCA, members pool their money into a common fund, generally structured around monthly contributions, and a single member withdraws the money from it as a lump sum at the beginning of each cycle. This continues for as long as the group exists. 

Joola is a money pool app that emphasizes transparency and financial wellness for members. It is a platform that connects individuals to overcome financial challenges together. It’s like having a support group for your financial needs.

Best of all, you can choose to find the financial flexibility you need. Receive an early payout in a group to get low-cost access to cash or get a late payout to earn rewards. 

Another benefit of joining Joola is getting the transparency you deserve. Fees calculation depends on your payout positions. All estimated fees are shown before you join the group. You can expect how much you’ll receive and the amount you have to pay. 

It’s free and easy to join Joola. Similar to a bank loan application, members are required to provide personal information and social security number. There is no impact on credit score when you join.