Payday Loans: A Descent into Debt with the Devil

Payday loans are never a good option to handle a financial crisis. In fact, they can create a devilish cycle of debt.

An AI generated image of the devil standing in front of a bank.
Payday loans can contribute to a cycle of debt that feels like being stuck in a deal with the devil.

Payday loans may seem like a quick and easy solution for financial emergencies, but the reality is that these short-term, high-interest loans can be like making a deal with the devil.

These cash advances can quickly lead borrowers down a dangerous path toward debt and financial hardship. With interest rates that often exceed 400 percent, payday loans can trap unsuspecting borrowers in a cycle of debt and make it nearly impossible for them to regain their financial footing.

Payday Loans Generally

With payday cash advances, the devil is in the details. These loans come with excessively high-interest rates and fees. Thus, payday loans are an expensive way to borrow money. Worse still, they are likely to create a cycle of debt that will feel like being in hell.

Payday lenders often target low-income or vulnerable populations. The loan terms are sometimes difficult to understand. Folks get trapped in a situation where they cannot pay back the loan.

Seven Layers of Payday Loan Hell

There are at least ten significant problems with the payday loan trap. We might even call them seven layers of payday loan hell.

1. High-Interest Rates

Payday loans and cash advances torture borrowers with high-interest rates. On average, these unsecured loans are charged 404-percent interest, according to a 2021 CNBC report.

Some U.S. states could be much worse, with payday loan lenders charging an average of 652 percent in Idaho, for example. Texans pay an average of 664 percent or about 40 times the average credit card interest rate.

These usurious rates mean that balances balloon up in days. Paying the money back will be really, really hard. Heck, pawn shops charge less.

2. Short Repayment Periods

They are called payday loans for a reason. They are short-term loans. The borrower might have to make a payment within days of receiving a small amount of cash from one of these lenders.

Those short repayment periods make paying off the loan very hard. It is effectively a devilish debt trap.

This problem was so bad that in 2017 the U.S. Consumer Financial Protection Bureau (CFPB) took steps to stop debt traps, noting that a quarter of payday loans were reborrowed nine times on average. Lots of folks can never pay back the full amount of the loan or even make the payments so quickly.

3. Fee on Top of Fee

When some poor borrower is late or does reborrow the funds, fees are applied.

These extra charges might include credit report fees, late payment penalties, rollover fees, repayment plan fees, and even pre-paid credit card fees—since some payday lenders use cards instead of cash.

The CFPB has estimated that for every $100 someone borrows from a payday lender, they should expect to pay $30 in additional fees on top of the high-interest rates.

4. Cycle of Debt

Here is the devilish math. Ridiculously high-interest rates plus short repayment periods and loads of fees equals an almost unbreakable cycle of debt.

Think about it. A person feels like they need to borrow $500 to pay for an unexpected auto repair. They might even need the car to get to work. The combination of fees and interest could mean they have to make a $400 payment every two weeks for the next two months. Suddenly, they are giving away a big portion of their income to pay the loan balance.

This cycle leads to reborrowing, more fees, and interest. You get the idea.

5. Negative Impact on Credit Score

While it is likely that many payday loan borrowers cannot qualify for a "regular" loan from another credit provider, adding a payday loan will only have a negative impact.

First, payday lenders rarely report positive information to a credit bureau like TransUnion, Experian, or Equifax. There are exceptions, but for the most part, making every payment on time and as promised will have no impact on the borrower's FICA credit score. Plus, even if they report timely payments, having a payday lender on your credit report can be harmful.

Second, those say lenders that did not report good payment history will trip over themselves rushing to report missed payments. Bottom line, payday loans have a negative impact on credit reports.

6. Debt Collectors

After a borrower has entered this devilish debt trap and fallen behind, the debt collection calls will begin.

Some payday debt collectors will call five times a day, text friends, and try to reach out on social media.

7. Not Much Regulation

Borrower advocates —including some of us at You, Money, Happiness— believe that payday lenders are not well-regulated.

This means they can do some shady things, in our opinion. For example, imagine a borrower who takes out an online payday loan, intending to pay as promised. This borrower makes a few payments via ACH but later falls into the payday loan debt trap. The payday loan folks may start to submit unauthorized ACH withdrawals and even switch the source of those withdrawals to prevent a borrower from blocking them.

Payday Loan Alternatives

When someone feels trapped or is experiencing a financial emergency, dealing with the devil —payday lenders, in this case— can feel like the only option. There are often alternatives.

  1. Personal Loans from banks, credit unions, or online lenders may offer relatively lower interest rates and terms. The borrower may need a fair credit score, but these are much better options.
  2. Talk to family or friends. Friends don't let friends fall into the payday loan debt trap. Better to ask mom or dad, sister or brother, or even aunt or uncle for a little cash than to take out a payday loan.
  3. Credit card advances can be an option too. In nearly every case, a credit card advance will have a much lower interest rate than a payday loan.
  4. Even over-drafting a bank account is better than taking out a payday loan. Many banks offer overdraft protection for personal checking accounts. This protection will allow someone to run a negative balance without necessarily incurring a fee.
  5. Employers will help too. Good employers always offer employee assistance programs, including payroll advances. This is a normal practice. It cannot be abused, but it can be used.
  6. Government assistance programs, like the Temporary Assistance for Needy Families or the Supplemental Nutrition Assistance Program, can provide low-income individuals and families with financial assistance to cover basic needs.
  7. Charitable organizations like a local church will often help too. The Well Church in Boise, Idaho, for example, will regularly help members with emergency assistance. Look for independent reformed churches. They will be most likely to help.

There is never a reason to take a payday loan. Get help some other way.