What Is a Payday Loan (and Why Are They So Bad?)

If you’re in financial problems (and even if you’re not) you’ve probably seen the ads for “payday loans.” Sounds good–if you’re short at the end of the month, just borrow a small amount of money, usually $100 or $200, for a short period of time, and then pay it back when you get paid.

So why are payday loans so bad?

It’s the interest rate. Typically, these loans will require you to pay $15 - $30 more than you borrow when you pay them back in a week or two. So if you borrow $100 for a week, you’d  pay back $115. That’s not so bad, is it? Well, yes, it is.

Loans are compared based on their Annual Percentage Rate, or APR. This gives you a good rate of comparison for rates with different terms and conditions. Federal and state law require the disclosure of the APR for most consumer loans. What’s the APR on a $100 loan that you pay $115 back in a week? It’s a jaw-dropping 780% APR! Loan shark rates. It makes the default interest rates on credit cards look positively friendly.

But, you say, you still need the money. What can you do? The Federal Trade Commission, which advises against using payday loans, has some suggestions.