How to Avoid Hidden Payday Loan Fees

EPF Last Update: May 23, 2020

When bills are piling up, it can feel like a struggle just to stay above water.

The stress. The worry. Where can you turn?

When choosing a path that’s right for you, we strongly recommend you avoid payday loans. While they seem great on the surface, they come with both extremely high annual APRs and hidden costs that can lead you spiraling down a vicious debt cycle.

So what should you do?

To help with the decision-making process, we compiled a list of three hidden payday loan fees to keep in mind before considering a payday loan. As well, we also have 10 tips for how to avoid payday loan fees and still generate the cash you need.

Ready to get started?

3 Hidden Payday Loan Fees

  • High annual APR

When you take out a payday loan – rather than categorizing the out-of-pocket costs as an interest rate – lenders usually charge $15 to $30 for every $100 borrowed. So for example, if you take out a $300 payday loan for a duration of two-weeks – with a fee of $15 per $100 borrowed – you can expect to pay back $345 from your next paycheck.

When doing the math, this works out to a 15% interest rate on the loan.

However, on a compounded annual basis, this works out to an annual APR of nearly 400%.

Sound like a good deal?

  • Rollover fees

If you find yourself in the unenviable position of defaulting on the loan, payday lenders usually allow you to ‘rollover’ the loan and extend its due date.

And why do they do this?

To extract even more money from your bank account.

By rolling over the loan, you’re required to pay both the original loan fee and a penalty fee for the late payment. Don’t forget, you still owe the principal balance as well.

Going back to our example above, say your $300 payday loan is extended another two-weeks. You’ll be charged a rollover fee of $45, plus another $45 fee at the end of the two-week extension period. This sums to $90 in extra fees on top of the $345 already owed on the original balance.

With a $135 in total charges on a $300 four-week loan, payday loan costs can quickly get out of hand.

  • Bank overdraft fees

Another charge to consider is bank overdraft fees.

When a payment is charged to your checking account by the payday lender and your account doesn’t have the funds to fulfill the entire transaction – banks can charge overdraft fees that increase your costs that much more.

The Consumer Financial Protection Bureau (CFPB) found that 20,000 bank account holders who made payments to online payday lenders incurred an average of $97 in overdraft and non-sufficient funds fees. The figure is nearly three times more than the $34 incurred by the average American.

10 Best Ways to Avoid Payday Loan Fees

To avoid the high costs of payday loans, only take one out as a last resort. And before doing so, make sure you exhaust all resources so you don’t fall victim to these predatory lenders.

  • Ask your employer for a cash advance on next paycheck

While not ideal, asking for an advance on your paycheck can buy time to meet current expenses without incurring the interest costs of debt repayment.

  • Draw money from your emergency savings

If you’re already on a tight budget, it can be tough to grow your savings. However, if you have money set aside, use it as a means to pay the bills rather than settling for a payday loan.

  • Work overtime

If extra shifts are available at your workplace, consider putting in extra hours to make up for your budget shortfall. Moreover, you could earn supplemental income as an Uber or Lyft driver or by delivering food as part of Uber Eats.

  • Apply for assistance programs

If you haven’t already done so, check with your local government on whether you qualify for grant programs or social assistance. There are also many charitable, religious and community groups that help families in times of crisis.

  • Ask family members or friends for a loan

While money is a touchy topic when it comes to friends and loved ones, many family members are often eager to help when times get tough. You can even set the agreement in writing with terms that are fair for both parties.

  • Apply for a secured credit card

While APRs for secured credit cards at major US banks are still fairly high – ranging from 21.24% to 25.74% — they’re still much lower than what you’ll receive with a payday loan. If you’re interested, our study on average credit card interest rates has plenty of helpful information.

  • Apply for a small loan at a Federal credit union

While approval isn’t easy, federally regulated credit union APRs cannot exceed an annual rate of 18%. Before taking out a payday loan, make sure to contact your local credit union first.

  • Decrease your withholding tax

If you usually receive a tax refund at the end of the year, it means you’re paying more tax than what’s required on each paycheck. By decreasing your withholding tax, it ensures you’ll take home more money from each paycheck.

However, as a word of caution, do not lower your withholding tax below your marginal rate. If this occurs, you could end up owing taxes at the end of the year.

  • Apply for a small loan from a less expensive source

While this option may not be available to you, it doesn’t hurt to check with a variety of lenders to see if you qualify for any of their products. In your search, you may find a lender that’s sympathetic to your situation and more willing to provide a reasonable solution.

  • Get a cash advance on your credit card

As a second to last resort, a cash advance on your credit card is still cheaper than taking out a payday loan. Your APR will be a high and other fees will apply, but on aggregate, the out-of-pocket costs will be much less.

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