Payday loans—you’ve probably seen them advertised by several small lending shops around your neighborhood. Your friend may have talked about them in one of your lunches and gushed about how “awesome” they are. You’ve also read them online when you’re checking out options for possible loans. So you can’t help but ask, “What are payday loans?”

These days, payday loans are the first refuge for a lot of people. The requirements are almost non-existent, save for proof that you do receive a consistent salary and maintain a bank account. Some lenders also perform their business online, saving you the hassle of queuing for hours. Best of all, the borrowed amount can be yours within 24 to 48 hours—or sometimes less even sooner.

Payday loans are nothing new. They started back in the 1930s, when various mom-and-pop stores extended credit to their customers so they could buy food, clothing, and day items they needed. In turn, customers paid the loan on their next salary.

Later, these stores and new small lending shops transitioned to the modern payday lending. Borrowers issue a post-dated check on behalf of the lender, covering the loaned amount as well as the interest. Then the lender deposits the loaned amount less the borrowing charges into the borrowers’ bank account.



At first glance, payday loans seem to be completely harmless, if not the ultimate saviors for many individuals. They are quick and convenient. Small lenders are aplenty.

Deep down, however, payday loans may only worsen financial problems. These are high-interest short-term loans. They mature within 2 to 4 weeks and can carry annualized interest rates of over 4,000%!

It isn’t surprising, therefore, many borrowers are now living in a payday loan trap. This happens when the loans they obtained carry incredibly high interest rates their own salary may not be enough to cover for the entire amount due. They then have no other option but to apply for another payday loan to pay off the current one. And so forth. You can see how quickly this situation could spiral out of control.

Payday lending is a highly regulated industry. Many states have decided to set a cap on the interest rate and limit Internet lending and check cashing. Further, more than 10 states have now declared it completely illegal, whether online or offline.


Consider Other Options

Payday loans can be addictive and money draining. Avoid the vicious cycle by choosing other alternatives:

Borrow from friends and family members. Most likely, they’ll provide the funds for free or with no interest and specific payment term. This of course does carry its own set of problems where the relationship can be put under strain through the problems of money.

Ask for a grace period. Many lenders are actually open to extending your payment term with a minimal late fee. They would rather still receive their money, if not behind schedule, rather than not at all or spend more money in them having to chase you for it.

Focus on paying your debts first. Prioritize your debt settlement over savings. Begin with debts that have very high interest rates, such as credit cards and then work down from there. By over paying on the highest cost debt first each month, while still paying the minimums on the others, is one of the most effective first steps you can take to getting that debt under control.

Additional income. Take some part-time jobs every weekend or never say no to overtime work. That small increase in income can make a big difference in stopping the debt from continuing to growth.

Cut back. Limit or let go of non-essential expenses such as entertainment and takeouts for a while. This discretionary can really add up. A few dollars here, a few dollars, over a month, can make a real dent in your budget and is money that can be redirected to paying down your debts quicker.

Think about other types of loans. You can apply for a secondary mortgage with a lower interest rate or consolidate all your loans. However, be weary of using this approach and not altering your spending patterns. Gaining a lower interest rate on the debt is certainly a big help, but if spread over a longer time period, say 20 years with an increased mortgage, you will end up paying a significant amount of interest.