Payday loans are predatory and designed to trap you in a cycle of debt. Payday loans are short-term, high-interest, no-credit-check loans due on your next payday. Although these loans are legal in Texas, there is no fixed maximum financing fee, which means the interest charges can be more than 400% Annual Percentage Rate (APR).¹ According to CNBC, Texas has the highest payday loan rates, with an average of 664% APR on a $300 loan for 14 days.² With such high rates and an even higher risk of not being able to repay them on time, you need to avoid payday loans at all costs so you don't get trapped in this debt cycle. Learn more and find other options to help you make sound financial decisions.
How Do They Work?
Payday loans may be called a cash advance, a deferred deposit, or a check advance. They all work the same: You either write a postdated check or give authorization for a lender to electronically debit your checking account in exchange for cash, check electronic deposit, or prepaid debit card.
The loan is due by your next payday or when you receive other income from a pension or Social Security. This date is typically two to four weeks from when you got the payday loan. If you don't repay the loan and finance charges by the due date, the lender can cash the check or withdraw it from your account.
Some states, including Texas, allow the payday lender to renew or roll over the loan when it is due so that the borrower only pays the financing and late fees. The due date for the loan is then extended for another two to four weeks, and the lender may charge additional fees for this extension.
Payday lenders usually charge between $10 and $30 for every $100 you borrow. On a standard payday loan with a 14-day term, a fee of just $15 equals an APR of a staggering 391%. If you can't repay your loan when it is due, most payday lenders will let you extend or rollover the due date for another two or four weeks — but you will pay another fee and still owe the original loan balance. The APR increases each time you rollover the loan as additional fees are applied.
Here's an example:
|
Loan Amount
|
Fee ($15 per $100 borrowed)
|
Loan Term (Days)
|
Total Loan Amount
|
APR |
First Loan
|
$500
|
$75 |
14
|
$575 |
391%
|
1st Rollover
|
$500
|
An additional $75
|
14
|
$650
|
782%
|
2nd Rollover
|
$500
|
An additional $75
|
14
|
$725
|
1,173%
|
Other Options
Texas is one of the only states that doesn't have restrictions on the terms, loan amount, or finance charges for payday loans. According to the Consumer Financial Protection Bureau (CFPB), more than four out of five payday loans are reborrowed, and nearly one in four are reborrowed nine or more times.³
With such short terms, getting stuck in a cycle of rollovers or taking out a new payday loan to cover the original is easy. To avoid this high-cost debt, try these other options:
- Establish a $500 emergency fund. An emergency fund gives you peace of mind that you can pay for anything unexpected that may pop up, like medical events or repairs. You can start small and build your fund over time by setting up automatic deposits to a savings account every time you get paid. Even a small amount deposited each paycheck will help you reach the $500 goal and keep it funded.
- Develop a budget. Establishing a budget ensures you aren't spending more than you're making and that you know exactly what your expenses are. Once you have a budget to help build savings, your emergency fund will be your safety net for unexpected expenses. Learn more about setting up a budget in our articles, "Building a Basic Budget Part 1 and Part 2."
- Apply for a personal loan and consolidate your debt. If you've already taken out payday loans, you can break the cycle with a personal loan that has lower interest to consolidate your debt. While personal or unsecured loans may be harder to get approved for than a payday loan, it's much more affordable. Texell offers personal loans with lower rates than payday loans and same-day approval and funding in most situations. Visit Texell.org for more information.
- Find additional income. You can also seek other income with a part-time job or side gig.
The Bottom Line: You must avoid Payday loans; the cost is too high. To avoid feeling stuck with payday loans, make it a priority to get out of debt and build your emergency fund. Learn ways to get out of debt in our article, "Popular Strategies to Get Out of Debt." For help setting up your emergency fund, read "Emergency Fund: What You Need to Know and Do."
Texell can help you avoid payday loans with several lending options, including personal, secured, or home equity loans. You don't need to be a member to apply, but if approved, you'll become a member during the loan process. For more information or for help applying, call or text 254.773.1604 or schedule an appointment.
¹ Texas Payday Loans: Law, Stats and History from UStatesLoans.org.
² Payday loans can have interest rates over 600%—here's the typical rate in every U.S. state from cnbc.com.
³ Why are Payday Loans Bad? From Experian.com.
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