Although payday loans may seem like the best choice for consumers with poor credit who need quick cash, these loans come with high interest rates and little transparency about fees, prompting 13 states to ban them or adopt strict usury laws.
Compared to the annual percentage rate (APR) of 10 percent to 25 percent for a bank-issued personal loan, the APR on a payday loan can range from 300 percent to over 700 percent. The average payday loan borrower also pays $574 in fees annually and is in debt to payday lenders for seven months out of the year.
There are still less risky options, even for borrowers with poor or no credit. Some banks and credit unions offer loans of less than $1,000, for example. The FDIC began the Small-Dollar Loan Pilot Program in 2008 to increase the availability of alternatives to overdraft protection fees and payday loans. APRs can range from 5 percent to 36 percent. Some employers, meanwhile, may offer one-time cash advances to employees in good standing. A secured credit card may be another option; this type of account requires the user to provide a cash deposit of $300 to $500 as collateral. These cards can also help rebuild poor credit.
Additionally, there may be special financial assistance to former servicemembers and their families through military-aid societies such as Army Emergency Relief, the Air Force Aid Society, Coast Guard Mutual Assistance, and the Navy Marine Corps Relief Society. Consumers who are already struggling to repay a payday loan should avoid rolling over the balance into another loan and instead get in touch with a credit counselor who can help navigate the available options.