The Dangers of Payday Loans: Don't Fall for Their Trap (2023)

Payday loans seem to be everywhere these days. The industry is huge—there are more payday loan centers than McDonald’s. According to the Federal Reserve Bank of St. Louis, close to 12 million Americans use payday loans each year. And that’s no surprise, considering four out of every ten Americans don’t have savings to cover a $1,000 emergency.

If you’re considering using one for an emergency cash need, it’s crucial that you understand how payday loans work. It’s also important to understand how and why they may hurt your financial situation rather than help it.

Table of Contents:

What is a payday loan?

Payday loans are short-term loans that are meant to provide emergency cash. You can borrow a small amount of money—generally no greater than $1,000—with no credit check or lengthy loan underwriting process. So, you can get the cash you need quickly, even if you have bad credit.

The loan amount, along with fees, will typically be due within two weeks or by your next payday, whichever comes first. Other payday lenders use a process known as deferred deposit, where you post-date a check they can cash at the specified time.

The trouble with payday loans is that they can be a very expensive way to borrow money. All that convenience of no credit check and fast cash comes at the price of high interest and finance charges. This is especially true if you don’t pay back the full amount and finance changes by your next payday.

Payday loans vs other fast-cash products

While payday loans, short-term installment loans, and cash advance loans are often categorized as being the same or similar, there are a few differences that are worth noting:

Payday Loans Credit Card Cash Advance “Short-Term” Installment Loans
A short-term loan that comes with few application requirements and a quick turnaround time. In-store or online. Short-term cash you take borrow through a credit card. Be careful. A “short-term” installment loan is just a payday loan, as is a “cash advance loan”.
Can withdraw the entire amount, though usually no more than $1,000 (excluding Oregon, which has a $50,000 limit.[1] Not allowed to withdraw the entire portion. Interest rates on personal loans will be much better than on any payday loan, even with bad credit.
You can “rollover” the loan and pay on your next payday, though with more interest and late fees. Interest rates are normally around 400% APR on average. Accrues interest immediately but can carry debt long-term. Interest rates of 24% APR on average, but can be much higher if you have bad credit A broader category usually includes loans with longer terms. Any legitimate personal installment loan will require a credit check and a lengthy loan application process.
Finance charges average $30 for every $100 borrowed with interest rates as high as 400-500% Typically, 3-5% of the advance with a minimum fee of $10 Same as payday loans.

How payday loans work

Payday loans work differently from other personal loan products. Each state has their own set of laws pertaining to payday loans, dictating how much you can borrow and how much a lender can charge in interest and fees. In some states that we list below, you can’t get a payday loan at all.

You can apply for a payday loan and receive your cash in a few different ways. The process may be slightly different if you apply online versus in a brick-and-mortar storefront. But here is what you can generally expect:

  1. You apply for the loan online or in a store.
  2. You provide proof of your identity and proof of income.
  3. Once they verify you are eligible, you get your cash immediately.
  4. You receive the funds in the form of cash, a prepaid credit card or a direct deposit to your bank account.
  5. The money is due with finance charges in two weeks or by your next payday, whichever comes first.
  6. If you don’t pay the money back, you can use a rollover to keep the loan going, but this is where that 400% interest may apply.

In some cases, the amount may not be due in full within 2 weeks. There are payday lenders that offer “installment plans” which make them seem like a regular loan. You pay the amount you borrow back in shorter, fix installment payments.

Payday lenders usually require you to set up ACH withdrawal from your bank account to make payments. That means they get your bank account number and take their money out automatically. This is one of the big dangers of payday loans because they can drain your bank account dry. We’ll talk more about this issue below.

What do you need for a payday loan?

According to the Consumer Financial Protection Bureau (CFPB), to qualify for a payday loan, lenders only require borrowers to:

  1. Be at least 18 years of age
  2. Have an active checking account
  3. Provide proof of income and identification

You also need to live in a state that allows for payday loans. Many states have banned them because they’re a predatory loan product. These include:

  • Arizona
  • Arkansas
  • Connecticut
  • Georgia
  • Maryland
  • Massachusetts
  • New Jersey
  • New York
  • North Carolina
  • Pennsylvania
  • Vermont
  • West Virginia
  • Washington, D.C.

How payday loan interest and finance charges work

Finance charges always apply to payday loans, even if you pay the balance off on time. A typical payday loan finance charge is $30 for every $100 borrowed. So, if you borrow $500, the finance charges would be $150. You would need to pay back $650 to the payday lender.

If you don’t pay the balance off by the set date, then things quickly get more expensive with interest charges.

Payday loans have increasingly become the face of predatory lending and high-risk loans in America. That’s deserved given that the average interest rate is between 391% and over 600%! So, if you can’t repay the loans, then the interest rate soars and the amount you owe rises. It becomes increasingly difficult to pay off those payday loans.

You may think payday loans are your only solution for handling an emergency bill or paying off another debt, but a payday loan will usually end up giving you more problems than solutions. Think about it this way, if you get a credit card, you’re looking at an average of 15%-30% interest compared to 391%-600%. There are other options like debt management programs (with 8%-10% interest), personal loans (14%-35%), and online lending (10%-35%) that you can consider before opting for a payday loan.

While there are 18 states have capped interest at 36% on a $300 loan, that’s still high for interest charges. The median interest rate is 38.5%. And some states don’t have interest caps at all. In Texas, for example, interest can go as high as 662% for a $300 loan.

So, before you reach out and grab that payday loan, consider other options.

Find solutions to get ahead of your bills and debts.

Get Help NowCall To Action Link

How AutoPay and ACH withdrawals work and work against you

Automated Clearing House, or ACH withdrawals, are a type of electronic fund transfer that goes from one institution to another through the ACH network. Unlike other forms of electronic fund transfers, ACHs get pulled directly from a checking or savings account. [2]

There are some drawbacks to ACHs, however, as security is one of the biggest issues. The payer shares their banking information with the payee, and there is always a risk of it falling into the wrong hands.

(Video) Fighting the debt trap of triple-digit interest rate payday loans

AutoPay for payday loans functions as it would for a cell phone. You put the card that you want the funds to get taken from every pay period on file, and the money is automatically deducted at the time of payment. The trouble is that if you don’t have funds in your account, then you will get fit with non-sufficient fund (NSF) fees and bank overdraft fees. This can send your balance even further into the red.

It can also be difficult to stop ACH withdrawals. There are plenty of nightmare stories of people borrowing from a payday lender and then not being able to stop the ACH withdrawal. The lender just keeps draining your bank account.

Do I qualify for a payday loan?

It is fairly easy to qualify for payday loans, which is what makes them dangerous. You can get a loan in as few as 15 minutes. It typically won’t require a credit check either, which simplifies things. But that means you skip a crucial step of the lending process.

Lenders do credit checks and put borrowers through the underwriting process to make sure you can afford to repay a loan. So, if you’re given a wad of cash without that, you could end up owing much more than you can afford to pay back. The ease with which you can qualify for payday loans is why most people are not able to handle them properly.

Generally, all payday lenders require you have is:

  • An active bank, credit union, or prepaid card
  • Proof of income from a job or other source
  • Valid form of identification
  • Be at least 18 years old

The biggest problems with payday loans

The major issue with payday loans is that you often have a very short time frame to repay the entire amount of the loan. Usually, you only have a few weeks at most to come up with the cash. This is a far cry from how traditional personal loans function because you get the opportunity to pay back your loan over a much longer span of time.

Unfortunately, most people get forced into taking out a payday loan because their finances are already stretched thin. So, taking out a payday loan means committing a future paycheck to make one large payment. And that may cause you even more problems down the line.

If you haven’t had time to catch up on your finances, you may not have the money to cover the full cost of that loan come payday. If you can’t cover the loan, you are essentially forced to borrow again. One of the most troublesome aspects of a payday loan is the fact that you keep falling further and further behind. So, as the fees add up, you end up coughing up a fortune just because you needed to get by.

Even if you manage to pay off the loan right away, a large chunk of your check is likely to get eaten up by that payday loan repayment. That means you could soon run short of funds again, leading you to take out another payday loan, and so forth.

Basically, the problem with payday loans boils down to the fact that you’re committing future income to cover a current crisis. So, if you fall for this trap, you may be stuck in an ongoing cycle of taking on an expensive payday debt.

Understanding payday loan rollovers

Payday loan rollovers refer to the extension of a loan for another term. Borrowers will pay only the fees due, while the principal amount remains unchanged. Usually, rollovers are only available if borrowers are unable to pay back the full amount of the loan. Over 80% of payday loans cover previous loans that got taken out, not an original emergency that prompted taking out a loan in the first place.

Lenders have different rules for what constitutes needing a rollover loan. Your lender will make you aware of these before you agree to the rollover. Rollovers are not a decision to take lightly. If you’re feeling the pressure to pay back your loan and are struggling to do so, can connect you with certified counselors to help you through it. Call to connect with a counselor for free.

The issue with payday loan stacking

Payday loan stacking is the act of taking out multiple cash advance loans at once, prior to one advance being completely paid off. While most lenders won’t allow you to take multiple loans out through them, many consumers take out multiple loans from multiple different lenders. Not only does it make it harder to keep track of your payments, but each loan could have different terms, intensifying your debt.

Any payday loan not fully paid off will appear on your credit report or be discoverable through your bank statements. This makes your chances of getting approved for a second loan almost impossible. “Any borrower who takes out three payday loans in quick succession must be cut off by the lender, according to new CFPB guidelines.” [3]

Escaping a payday loan rollover trap

Many payday loan users live paycheck-to-paycheck and are unable to meet their obligation to repay their loan amount in full on time. This allows for the lenders to “rollover” the loan, adding more interest and fees, and snowballing the debt you were already in.

Lyle Solomon has helped over 6,000 people become debt-free and as a “payday loan crusader”, sought to bring payday loan equity to the forefront of people’s attention. Having seen a close friend’s life get destroyed because of his addiction to payday loans, it became his job to help people escape from the horrors of payday loans. He counsels his own clients that there are 11 solutions to get out of a payday loan rollover trap.

Get professional debt relief help now so you can find a solution that works!

Free EvaluationCall To Action Link

How to stop ACH withdrawals from a payday lender

If a payday lender refuses to work with you, you can block them from taking electronic withdrawals from your bank account by revoking the payment authorization. The steps are:

Step 1: Write the payday loan company (or any business that takes money out of your bank account)

Example of “Revocation of authorization for debits” letter

[Your Name]

[Your Address]


[Company Name]

[Company Address]

RE: Revocation of authorization for debits

(Video) Why a payday loan could cost you, get you trapped for life

To Whom It May Concern:

Please stop taking automatic payments from my bank account for payments to my account with your company. My account number with your company is [xxx-xxxx]. I am writing to inform you that I am revoking authorization for you to debit my account via electronic funds transfer:

_This revocation applies to any and all future debits.

_This revocation applies to the next scheduled debit. I have not revoked authorization for other debits.


[Your Name]

________________________ _________________
Signature Date

Download this letter as a Word document »

Step 2: Contact your bank or credit union

When you contact your financial institution, you’ll want to explain, in detail, who you want to block, the payment amounts, and dates. You must make sure to have the correct name of the company as shown in your bank statements. Businesses often have slightly, or completely, different names when they charge your account.

A stop payment order called a “Revocation of authorization for electronic debits,” is what you’ll send your bank or credit union to officially block payments from withdrawal.

Below is a sample letter you would send your institution. Make sure all of the information below is correct:

[Your Name]

[Your Address]


[Bank/Credit Union Name]

[Bank/Credit Union Address]

RE: Revocation of authorization for electronic debits

To Whom It May Concern:

[Company name] no longer has my permission to take automatic debit payments from my bank account. I have revoked the authorization that had enabled this company to debit my account via electronic funds transfer.

My Name: ___________________________
Checking Account Number: ___________________________
Payee Company Name: ___________________________
Account number with Payee Company: ___________________________

(If you have the information, provide):

Payment amount or range of amounts: ___________________________
Date[s] the schedule payment[s] appeared on my account statement: ____________

Specifically (select one):

_ I have revoked authorization as of _____ date for any future debits by [Company name].

_ I have revoked authorization as of _____ date for the next scheduled debit by [Company name]. I have not revoked authorization for other debits.

[Your Name]

________________________ _________________
Signature Date

Download this letter as a Word document »

(Video) Payday Loans

Payday loan FAQ

Q:How will a payday loan affect my credit?

A: If you pay the loan back on time, it will not affect your credit at all. Payday lenders generally do not report payments made on time to credit bureaus. They do, however, report payday loan collections to the credit bureaus. So, there’s no chance a payday loan can help your credit but there is a very good chance it can hurt it.

Q:Are payday lending practices getting better?

A: No, worse. New rulings by courts are allowing out-of-state payday loan lenders to override state laws. This means that lenders often don’t have to follow state consumer protection laws.

Q:How much can you borrow for a payday loan?

A: In many states, the limit is $500, while some allow for up to $1,000. There are a few states like Maine, that have no limit, and Oregon, which has a limit of $50,000.

Q:What are the pros and cons of taking out a payday loan?

A: Pros – Easy to access, can get approved with bad credit, fewer requirements than other loans.
Cons – High-interest rates, easy to get trapped in “rollover”, lenders can sue you over the money you owe.

Q:What are the interest rates on payday loans?

A: Interest rates vary state by state. Quite a few states cap the loans at 36%, but interest rates climb dramatically outside those states. For example, Oregon has a maximum rate of 154%, while just over the border in Nevada, you can pay up to 652%.CNBC has a mapand lists the rates allowed for each state.

Q:Do payday loans have application fees?

A: No. The only thing you must give a lender at the time of applying is either, a postdated check made out to the lender for the full amount plus any fees, or you can authorize your lender to debit your checking account.

Q:Can you get denied a payday loan?

A: Payday loans, like all other loans, are not guaranteed. Should you have insufficient income, no proof of income, are in bankruptcy, or have no checking or savings account, then you can be denied for a payday loan.

Q:Can I take out more than one payday loan at a time?

A: Yes, it is usually possible to have more than one at a time. However, your new terms will be even worse than the original. The more loans you take out, the higher the interest rate.[4]

Q:What if I can’t pay a payday loan back?

A: If you fail to pay back the loan, the account will go to a collection agency, damaging your credit. You could also get summoned to court, which, depending on where you live, could lead to liens against your property or wage garnishment.

Q:Can I pay off a payday loan early?

A: Yes, but make sure you pay attention to your loan agreement. Lenders may charge you an early payoff fee. So, in some cases, it’s sensible to pay the loan back on the original date.

(Video) BCH: Payday loan dangers

Q:How long does it take to get money from a payday loan?

A: If you are in a store and approved, you receive your money right then. If you complete the application online, it is usually deposited in your bank account within two days or often within that same day.

Q:Can I be sent to jail for non-payment?

A: No. You can get summoned to appear in court, but you cannot go to jail for defaulting on a loan.

Q:Do military members have different protections?

A: The Department of Defense has mandated that military Service Members cannot take out payday loans.[5]

Find the help you need to get out of payday loan debt.

Get Free QuoteCall To Action Link


[1] What Is a Payday Loan and What are Safer Alternatives? ( [2] What is an ACH Withdrawal & How Does It Work? | Tipalti [3] Can I Have 2 Payday Loans At Once? (Fast Cash Solutions) ( [4] If I Owe a Payday Loan, Can I Get Another? Yes, But You Probably Shouldn’t – Credit Summit ( [5] Military Loans – My Green Loans

Consumer Financial Protection Bureau ( – What do I need to qualify for a payday loan?

Consumer Financial Protection Bureau (

How do I pay off my payday loan? – Speedy Cash

How Payday Loans Work: Pros & Cons – Self. Credit Builder. – How Payday Loans Work

Just 44% of Americans could cover a $1,000 emergency expense, survey finds – Marketplace

What If I Can’t Pay Back A Payday Loan? – Experian

What is a payday loan rollover? | Pheabs

Article last modified on November 10, 2022. Published by, LLC


Why is it important to avoid payday loans? ›

Relying on Fast Cash Can Lead to a Debt Cycle

Because of the high fees and interest rate, it's easy to get caught in a repeat cycle of rolling over the loan for another two weeks, or taking out another payday loan in order to pay off old loans.

How do I get out of a payday loan trap? ›

It's hard, but the steps you'll need to take to get out of payday loan debt include:
  1. Request a repayment plan from your lender.
  2. Use lower-interest debt to pay off a payday loan.
  3. Commit not to borrow any more.
  4. Pay extra on your payday loan.
  5. Consider debt settlement or bankruptcy.
1 Nov 2022

How do people get trapped in the payday loan cycle? ›

The Payday Loan Trap

Their high interest (equivalent to annual percentage rates of 400% or more), short repayment periods (typically two weeks), and the widespread practice of loan renewals or rollovers can suck borrowers into a costly cycle of loan extensions.

What is the biggest disadvantage of payday loans? ›

Disadvantages of Payday Loans
  1. They are expensive. For one thing, payday loans are sometimes very expensive. ...
  2. Payday loans are considered predatory. ...
  3. It is easy to get trapped in a cycle of debt. ...
  4. They have access to your bank account. ...
  5. Some payday lenders use questionable collection practices.

What is a payday loan and why is it problematic? ›

Payday loans are short-term loans designed to pay for small immediate expenses. They often come with high fees and need to be repaid within a couple weeks, making them difficult to pay off on time. Due to this, the majority of payday loan borrowers will roll their loan into a new one, taking on additional fees.

How do payday loans affect society? ›

These problems affect entire families. Low-income families with access to payday loans are also more likely to struggle with bills like the mortgage, rent, and utilities. This can lead to foreclosure or eviction, which can devastate families in the short- and long-term.

How long can you go without paying a payday loan? ›

Debt collection activity: Your lender will attempt to collect payment for you for about 60 days. If you're unable to pay them within this time frame, they'll likely turn to a third-party debt collection agency.

What three things can you do to prevent having to get a payday loan? ›

If you need cash to help you cover expenses until your next paycheck, consider these alternatives to payday loans.
  • Apply for a personal loan. ...
  • Reach out to friends and family. ...
  • Research local resources. ...
  • Talk to your job's human resources department. ...
  • Explore early payday apps. ...
  • Borrow from your credit card.
15 Jun 2021

Is there a way to get out of a payday loan? ›

Strategies for Getting Rid of a Payday Loan

Pay off the loan with a new, less-expensive loan. Pay off the loan with savings. Arrange an extended repayment program with your current lender. Temporarily increase your available cash to eliminate the debt.

How can loans trap someone in a cycle of debt? ›

A debt trap is when you spend more than you earn and borrow against your credit to facilitate that spending. While this can certainly be caused by unnecessary spending, having inadequate savings to handle unforeseen costs can also result in a debt trap.

What makes payday loans difficult for customers to pay back? ›

Payday loans typically carry annual percentage rates of 300 to 500 percent and are due on the borrower's next payday (roughly two weeks later) in lump-sum payments that consume about a third of the average customer's paycheck, making the loans difficult to repay without borrowing again.

Why do people use payday loans? ›

Payday loans are short term, high interest loans designed to give borrowers a quick cash advance in a pinch. For many who live paycheck to paycheck, struggle with debt or have bad credit, payday loans provide immediate funds that they may not qualify for elsewhere.

What are two disadvantages of payday loans? ›

Reasons to Avoid Payday Loans

Payday Loans Are Very Expensive – High interest credit cards might charge borrowers an APR of 28 to 36%, but the average payday loan's APR is commonly 398%. Payday Loans Are Financial Quicksand – Many borrowers are unable to repay the loan in the typical two-week repayment period.

What are the disadvantages of using loans? ›

Loans are not very flexible - you could be paying interest on funds you're not using. You could have trouble making monthly repayments if your customers don't pay you promptly, causing cashflow problems. In some cases, loans are secured against the assets of the business or your personal possessions, eg your home.

What are the disadvantages of loan? ›

What are the disadvantages of bank loans?
  • Strict eligibility criteria. One of the major disadvantages of a bank loan is that banks can be cautious about lending to small businesses. ...
  • Lengthy application process. ...
  • Not suitable for ongoing expenses. ...
  • Secured loans carry risk.
16 Aug 2022

What are some true facts about payday loans? ›

While fast cash and no credit checks makes it easy for a consumer to get a payday loan, it usually only postpones the financial crisis for two weeks until the loan comes due. Because payday loans are targeted to people in financial trouble, there are few borrowers who can pay off their loan at that point.

Is a payday loan secure or unsecure? ›

Payday loans are considered a form of “unsecured” debt, which means you do not have to give the lender any collateral, or put anything up in return like if you went to a pawn shop.

What happens if you just don't pay loans? ›

When you stop paying a personal loan, it could result in your account going into default, the balance being sent to collections, legal action against you and a significant drop in your credit score. If money is tight and you're wondering how you'll keep making your personal loan payments, here's what you should know.

Can payday loans come after you after 10 years? ›

In most cases, the statute of limitations for a debt will have passed after 10 years. This means a debt collector may still attempt to pursue it (and you technically do still owe it), but they can't typically take legal action against you.

What is a payday loan and why is this considered high risk? ›

Payday loans — These are high-cost loans with a short loan term — you typically must repay them in full within two weeks, or by your next paycheck. These loans have fees that equate to exorbitant annual percentage rates (APRs) of about 400%, according to the Consumer Financial Protection Bureau.

What is the most important thing to consider when getting a loan? ›

Credit score and credit history

A good credit score and credit history show lenders that you pay your credit obligations on time. The better your credit, the better your chances of securing a loan at the most favorable terms. The best terms can save you thousands over the life of the loan.

Can payday loans collect after 7 years? ›

Step 1: Check the statute of limitations for your state

Essentially, a collector only has a limited time where they can take you to court over a debt. The good news for you, Gabriela, is that the statute of limitations for written contacts where you live in California is four years.

Why is a loan a trap? ›

The debt trap is a situation where you are forced to over consume loans to repay your existing debts. Over time, you get stuck in a situation where the debt spirals out of control, exceeding your repayment capacity, making you fall into a debt trap.

How do you avoid a loan trap? ›

Factors To Help You Avoid Debt Traps
  1. Creating an Emergency Fund. ...
  2. Consolidating various loans under a single one. ...
  3. Checking monthly expenses. ...
  4. Balancing the monthly debt servicing. ...
  5. Tracking the market value of your home equity. ...
  6. Leveraging cash flows to prepay high-cost debt. ...
  7. Avoiding impulse spending.
4 Aug 2022

Why do people fall in debt trap? ›

Making impulsive purchases just for the sake of offers

Eventually, such urges become the root cause of many people failing to repay their entire dues on time, and gradually falling into a debt trap.

Are payday loans Good For You? ›

Payday loans are designed to trap you in a cycle of debt. When an emergency hits and you have poor credit and no savings, it may seem like you have no other choice. But choosing a payday loan negatively affects your credit, any savings you could have had, and may even cause you to land you in court.

What is the truth about payday loans? ›

Payday loans are typically short-term, low-amount loans that are easy to apply for and typically come due on the applicant's next payday — hence the name “payday loan.” It sounds good in theory, but there's one big problem: The interest rate and fees make it nearly impossible to pay in a timely manner.

What are three disadvantages of payday loans? ›

Reasons to Avoid Payday Loans

Payday Loans Are Very Expensive – High interest credit cards might charge borrowers an APR of 28 to 36%, but the average payday loan's APR is commonly 398%. Payday Loans Are Financial Quicksand – Many borrowers are unable to repay the loan in the typical two-week repayment period.

Why are payday loans unethical? ›

Borrowers, due to exploitative loan structures, are not given a fair chance to repay their loans. Industry defenses also center around fairness. Given the high rate of delinquency inherent to payday lending, the small value of each loan, and the short term of each loan, seemingly high interest rates are fair.


1. Payday Loans For Bad Credit - The 5 Dangers
(All Credit Loans)
2. What Are The Dangers of Payday Loans?
3. Are Payday Loans Ever a Good Idea?
(Two Cents)
4. Do young people know how to avoid payday loan debt traps?
(Caroline Russell)
5. Stop Pay Lending - Eliminate the Debt Trap!
6. Payday Loans Trap Borrowers
Top Articles
Latest Posts
Article information

Author: Otha Schamberger

Last Updated: 12/19/2022

Views: 6000

Rating: 4.4 / 5 (75 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Otha Schamberger

Birthday: 1999-08-15

Address: Suite 490 606 Hammes Ferry, Carterhaven, IL 62290

Phone: +8557035444877

Job: Forward IT Agent

Hobby: Fishing, Flying, Jewelry making, Digital arts, Sand art, Parkour, tabletop games

Introduction: My name is Otha Schamberger, I am a vast, good, healthy, cheerful, energetic, gorgeous, magnificent person who loves writing and wants to share my knowledge and understanding with you.