Here's What Happens When You Take Out a Payday Loan

When money's tight and bills are due, payday loans can seem like a nice option to tide you over until you get a little more money in your bank account. They offer quick cash and many lenders don't check your credit reports or scores. As long as you've got a job with a steady paycheck, you can walk away with the money you need, often on the same day.

But that's where the good news stops. Because in a few short weeks, you'll have to repay what you've borrowed, plus interest -- and that's a lot easier said than done. Here's why.

How payday loans work

Payday loans are a type of short-term loan, usually limited to a few hundred dollars. They're meant to help hold you over until your next paycheck, when you can theoretically use your income to pay back what you owe. But often, this doesn't happen.

Payday loans, like all loans, charge interest rates to borrowers. This interest is how the lender makes a profit and how they afford to lend money to others who need it. But while the average 30-year mortgage interest rate, for example, ranges from about 3% to 7%, depending on economic conditions, payday loan interest rates can be in the triple digits.

Oregonians, for example, can expect a 140% interest rate on a 14-day, $400 payday loan, according to the Center for Responsible Lending. And that looks reasonable next to the 662% that Texans pay to borrow the same amount.

To put this in perspective, if you borrow $400 with a 14-day term and a 662% interest rate, you'll owe over $501 in two weeks. If you can't pay that back, you might have no choice but to take out another, larger payday loan to cover your new balance. And that just leads to more interest, which leads to a bigger debt problem. Before you know it, that so-called short-term $400 loan has cost you thousands of dollars.

Those who fall into the payday loan trap have a difficult time getting out of it. And if they fall behind on their payments, they could also ruin their credit, which will make it more difficult for them to secure other types of loans in the future.

Alternatives to payday loans

Some states have taken steps to limit the fees payday lenders can charge customers, but even then, these loans usually aren't what anyone would consider affordable. It's usually best to avoid them if you're able to. Here are some other things you can try instead:

• Save up: For financial concerns that aren't pressing, try to save up for them over time rather than taking out a payday loan. And establish an emergency fund so unplanned expenses don't derail your budget.
• Take out a personal loan: Personal loans are loans that don't require any sort of collateral. You can use them for pretty much anything, including to pay off other loans. Interest rates on these types of loans are higher than what you'll find with mortgages or auto loans, especially for borrowers with poor credit. But they're significantly lower than what payday loans charge.
• Look into payment plans: Depending on who you owe, you may be able to set up a payment plan. Hospitals, for example, often offer these so people can pay off their medical bills over time rather than all at once. Talk to your creditor to see if it offers any options like this.
• Check out payday alternative loans: Payday alternative loans are similar to payday loans, but they're much more affordable. To find one of these, you'll usually have to look to credit unions.

The right solution for you will depend on what you need the money for and how quickly you want it. But it's best to explore all the options available to you before making your decision. Chances are, you can find something better than a payday loan.