When cash runs short and bills are looming, some consumers look to payday loans. If not approached with caution, these loans can snowball into a significant debt obligation of their own, with high interest rates and high-pressure collection tactics.
Payday loans involve borrowing money against your next paycheck. Borrowers write a check for the amount they wish to borrow, plus any finance charges, and receive cash. The average loan term is about two weeks, but loans can be renewed -- and often are.
Payday loans can come with exorbitant fees; a common finance charge is $15 or $30 per $100 borrowed, and annual interest rates can balloon into the hundreds. In Missouri, the maximum interest rate for a payday loan is 462% APR, though state law limits total interest and fees for the life of a payday loan -- including all renewals -- to 75% of the initial loan amount. Illinois law caps payday loan interest rates at 404% APR. These high interest rates can force these borrowers to renew the loan and pay new fees every two weeks until they can finally save enough to pay off the principal and get out of debt.
Payday lenders may appeal to people who may be unable to obtain a credit card or bank loan, but they can create a dangerous debt cycle. Consumers should understand the costs before borrowing.
BBB received more than 1,200 complaints about payday lenders in 2019. Many complaints revolved around high interest rates, as well as difficulty canceling a loan contract or obtaining a refund for automatic payments withdrawn in error. In April 2020, a St. Louis man told BBB he paid off a loan early with a local payday lender, but the lender continued to call him about daily interest and quote him a different payoff amount.
In addition, BBB Scam Tracker has received numerous reports about online payday loan fraudsters duping desperate borrowers into wiring upfront fees, but receiving no funds in return. A St. Louis consumer reported losing $200 after being contacted by a payday lender that requested upfront fees in the form of two gift cards.
Tips to help consumers become informed borrowers:
- Do your homework before borrowing. Check out the lender’s BBB Business Profile at bbb.org. It includes the company’s history of complaints and how they were handled, customer reviews and more.
- Be wary of upfront fees. Some short-term loan providers ask for a post-dated check to cover the amount you borrowed plus interest and fees. However, if any lender asks for those fees in cash before giving you any money, walk away — especially if it’s an online lender asking for money via wire transfer, which cannot be traced.
- Limit the amount you borrow. Only borrow what you know you can pay off with your next paycheck. Most companies will allow you to “roll over” the balance for several weeks or months, but will tack on fees the whole time. This can result in you owing several times the original amount you borrowed.
- Know your rights. Payday lenders are required to disclose certain information before initiating a loan. That information includes the cost, the interest rate to be paid and the specific fees that will be paid.
- Read the fine print. Pay attention to fees and consequences of nonpayment. Will the company let you make arrangements if you cannot pay?
- Keep your documentation. Many consumers report receiving calls from collection agencies long after paying off a payday loan. Some calls are simple errors, but others are attempts by scammers to collect a debt that is not owed. Protect yourself by having documentation that all loans are paid in full.
- Know where to turn. If you feel a lender has committed fraud or taken advantage of you, file a complaint with BBB and the FTC.