When you’re short on cash in between paychecks or have an unexpected financial emergency, a payday loan can be a tempting option to help make ends meet or access money quickly. However, these short-term loans, which are typically due on your next payday, are extremely risky. They come with very steep interest rates and other fees. The interest rate on payday loans across the United States ranges from 114 percent to as high as 652 percent.

Equally troubling, payday loans are often marketed to those who can least afford them — individuals earning less than $40,000 annually. While this type of lending is advertised as a short-term loan, payday loans can create a cycle of debt that’s difficult to break free from.

What is a payday loan?

A payday loan is typically a short-term loan, lasting anywhere from two to four weeks, that does not require collateral to obtain. These loans are usually expected to be repaid in a single payment with your next paycheck when you receive income from Social Security or pension payment.

In most cases, payday loans are granted for relatively small amounts, often $500 or less, with the average borrower obtaining a payday loan for about $375. In some cases, payday loans can be made for larger amounts.

To get a payday loan, borrowers are asked to write a personal check for the amount of the debt plus any finance fees. If the loan is not paid back on time, the lender will deposit the check to recoup their funds. Some lenders may ask for authorization to electronically deduct the funds from your bank account instead of requiring that you provide a personal check.

Payday loans generally do not involve credit checks and your ability to pay back the debt while also continuing to pay your everyday expenses is typically not considered as part of the application process.

Who usually takes out a payday loan?

Payday loans are most commonly sought out by those who have ongoing cash flow challenges, as opposed to borrowers who find themselves facing a financial emergency. A study of payday loans found that 69 percent of borrowers first resorted to getting a payday loan to cover recurring expenses such as utility bills, rent, mortgages, student loan payments or credit card bills. Just 16 percent of borrowers use payday loans for unexpected expenses.

These loans are also widely used by individuals living in neighborhoods and communities that are underserved by traditional banks or do not have a bank account with a major financial institution. Payday lenders operate stores in 32 states, though a handful of states have recently passed reforms requiring payday lenders to shift from a model in which borrowers must repay the loan in full with their next paycheck to a more equitable and less risky installment repayment structure.

What are the risks of payday loans?

Because of the many risks associated with payday loans, they are often considered predatory. To begin with, payday loans often come with astronomical interest rates. Many payday lenders also offer rollovers or renewals, which allow you to simply pay the fees for borrowing the money on the loan’s due date and extend the balance due for a longer period. This can be a slippery slope that causes borrowers to quickly get in over their heads with accumulating fees and interest.

According to recent data from the Pew Charitable Trusts, the average borrower ends up in debt for five months to fully pay back what was supposed to be a single repayment payday loan. In the process, borrowers pay hundreds of dollars more in fees than was originally advertised for the loan.

How much does a payday loan cost?

Borrowers generally pay between $10 to $30 for every $100 borrowed, according to the Consumer Financial Protection Bureau. A typical payday loan with a two-week repayment timeline and a fee of $15 per $100 equates to an APR of nearly 400 percent.

You could also incur fees if you opt for a rollover or extended payment plan. The amount varies by lender and state regulations (if rollovers and repayment plans are permitted in your state).

Some lenders also tack on late fees for delinquent balances. These added costs, coupled with NSF fees from your bank, can make payday loans even more expensive. Like rollover and repayment plan fees, the amount the lender can assess, if any, depends on state law.

If you opt to receive the loan proceeds on a prepaid debit card, this option may also come at an added cost. You’ll need to read the fine print to know what to expect by selecting this funding method.

Are payday loans ever worth it?

With their steep interest rates and fees, a payday loan is rarely a good idea. The fees alone cost Americans $4 billion a year. Because the costs associated with these loans are so high, borrowers often struggle to repay them and get into deeper debt, making it a good idea to consider your options carefully before taking on a payday loan.

However, if you have an urgent need or require cash quickly and are certain you’ll be able to pay the loan back with your next paycheck, then a payday loan may make sense. These loans may also be worth considering if you have no other financial options or poor credit and would not qualify for a traditional loan.

Alternatives to payday loans

Before taking on the significant financial risks associated with a payday loan, investigate other alternatives that may be less costly. Some of the options to consider include:

  • Borrowing money from family or friends: Payday loans should be a last resort. If you have family or friends willing to help, it can be better to borrow money from loved ones rather than from a predatory lender.
  • Home equity loan: Tapping into your home equity will offer a far more competitive interest rate than a payday loan. Home equity loans are a popular way to access cash to consolidate debt or pay for other major or unexpected expenses. To access your home’s equity, however, you’ll need to meet certain requirements, including having a good credit score, steady income and a debt-to-income ratio of 43 percent or less.
  • Payroll advance: Some employers may offer the option of taking a payroll advance. This involves the employer providing you with a short-term loan that you would pay back from your future wages. Typically, the employer establishes guidelines surrounding how and when the money must be repaid.
  • Personal loan: For those with a good credit score, a personal loan can be a safer and more cost-effective option for borrowing. What’s more, if you need cash quickly, some online lenders can provide personal loan funds in as little as a day or two.
  • Selling unwanted items: There are various online platforms that allow you to turn all sorts of unwanted items into fast cash. Some of the most well-known options include eBay, Facebook Marketplace, Craigslist and OfferUp. If it’s unwanted or used clothing you’d like to convert into cash, there are also reselling platforms online that specialize in this niche, including ThredUp, Poshmark and TheRealReal. Many of these marketplaces deposit the proceeds from sales directly into your bank account, while others, like OfferUp allow you to sell locally and receive cash directly from buyers.
  • Side hustle: Thanks to the proliferation of apps and websites like Thumbtack, TaskRabbit, Rover, Uber and Lyft, it’s possible to perform a few odd jobs in your spare time to quickly accumulate a secondary stream of income. TaskRabbit, for instance, allows taskers to do everything from assembling furniture for extra cash to providing home delivery, gardening and mounting televisions. Rover is a pet sitting and walking network where animal lovers can offer services.

Bottom line

With steep interest rates and tight repayment timelines, payday loans are rarely the best choice when you need cash. Often these types of loans trap borrowers in an inescapable cycle of debt.

Before resorting to a payday loan, consider the many alternatives. Borrowing money from family or friends, opening a home equity loan or taking out a personal loan are far less risky options. And if you’re not in a rush for the cash, there are still more options, including selling unwanted items or picking up a side job to earn the extra cash you need.