Payday loans: why they're a trap

A payday loan is a small, short-term loan you repay on your next payday — typically $300 to $1,000 for 2 weeks. They're marketed as a quick solution to emergency expenses, but the effective interest rate is brutal, and the business model is built on borrowers who can't repay the first loan and roll it into a new one, over and over.

The real cost

A typical payday loan charges $15 per $100 borrowed for a 2-week term. That sounds manageable. Annualized, it's 391% APR. A credit card at 24% is a bargain by comparison. If you roll over a $500 payday loan for a year — which is what happens to most borrowers — you end up paying about $1,950 to borrow $500.

Alternatives in a pinch

• Credit card cash advance. Expensive, but still dramatically cheaper than payday lending (25–30% APR vs. 391%).
• Employer paycheck advance — many companies, especially larger ones, offer emergency advances at 0% interest.
• Credit union small-dollar loans. Many credit unions offer 'Payday Alternative Loans' (PALs) at much lower rates.
• Payment plans with whoever you owe. Utilities, medical providers, and landlords often prefer a payment plan over a collections process.
• Asking family. Awkward but almost always cheaper.
• Selling something you don't need.