When I was in college, I got a payday loan. I needed $200 to pay my rent while I waited for my first paycheck from a new job. Instead of phoning my folks, I went to the payday loan place, armed with my bank statement. I got the payday loan, and was told that I needed to write a check for $220. The extra $20 was the fee. After two weeks, the check was cashed. I never went back.

Payday loans are among the worst financial products out there. They may seem like a good idea because they are relatively easy to get, but there are some very good reasons to stay away from payday loans. Here are 4 reasons that payday loans are a bad idea:

1. Payday Loans Come with High Interest

Payday loans can come with annual interest rates in excess of 300%. In my case, if I assumed simple interest, my college payday loan came with a 240% annual interest rate. (If I had extended the loan for another two weeks, it would have been another $20.) Even in states where payday loan rates are capped, you still might pay 36% or more. That kind of interest rate can quickly drain your wealth as you pay it someone else, rather than putting the interest to work for you.

2. Payday Loans are Too Easy to Renew

The ease of renewal is another reason to avoid payday loans. It is so easy to get trapped in the payday loan cycle of debt. All I had to do to renew my payday loan was to go in and pay another $20 before the check was cashed. It seems preferable to pay $20 instead of allowing $220 to be taken out of my account. However, if I paid $40 every two weeks, in five months, I would have paid $200 — and still had my entire $200 principal left to pay. Pretty soon, you are in a cycle in which you just keep making the smaller payments to renew, but never make progress on your actual debt.

3. Your Credit Score Can Be Impacted

The types of credit that you have count when it comes to your credit score. Indeed, a payday loan has more of a negative impact on your credit score than an auto loan or a major credit card. You might not see a huge drop in your credit score when you get a payday loan, but you could see enough of a problem to cost you later. Plus, a lot of little dings can add up to big drops eventually.

4. You Have Other Options

Chances are that you have other options. I should have called my parents. When I had a bit of a money mess last summer, I called my parents; no payday loans for me this time. They gave me a loan of $500 for two weeks — and didn’t charge interest. Even if they had charged interest, it would have been much less than the rate charged at a payday loan place. Friends and family, credit cards and even personal bank loans are items preferable to payday loans. If you have any other option, you should take it before getting a payday loan.



Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.