Sometimes you need money immediately – you can’t even wait for your next paycheck. But you don’t qualify for a low-interest personal loan, and if you can’t even wait until your next payday, how can you hold off for a few months until your credit score improves?
Payday advances are designed to attract people in exactly this type of situation. They sound great with promises of same-day cash loans and flexible repayment terms, but these loans come with conditions you need to seriously consider.
What is a Payday Advance?
Also called a payday loan or bad credit loan, this type of advance is a small-dollar loan meant to “ride you through” until you get paid. In theory, you receive an amount between $100 and $1,500 in exchange for your promise to repay it in whole or part on your next payday.
According to the Consumer Financial Protection Bureau, this is how it works:
“To repay the loan, you generally write a post-dated check for the full balance, including fees, or you provide the lender with authorization to electronically debit the funds from your bank, credit union, or prepaid card account. If you don’t repay the loan on or before the due date, the lender can cash the check or electronically withdraw money from your account.”
Pros of Payday Advances
Payday loans offer one large benefit that other types of loans don’t: They’re available to people with poor credit or no credit at all. Usually, they only require that:
- You’re at least 18 years of age
- You have a Social Security number or government-issued ID
- You have a regular and documented source of income
- You have an active bank account
Notice that no minimum credit score is a requirement for a payday advance; in fact, credit scores don’t figure into approval at all. This means you can still access a payday advance even with a terrible credit history, active bankruptcy, or other issues that exclude you from traditional loan options.
Additionally, unlike a car loan or mortgage, payday loans are unsecured. This means you don’t need to offer personal property as collateral. You don’t risk losing any property if you fail to pay your payday loan.
In short, a payday loan is the closest thing to a sure thing in the financial universe.
Cons of Payday Advances
There are many disadvantages of payday loans, which is why experts recommend steering clear of payday advances unless it’s absolutely, positively unavoidable.
First, payday loans charge extreme interest rates. These rates are higher than you’ll find anywhere else, sometimes reaching 400%. Compare that to a traditional personal loan that might charge a 6% or 11% interest rate, or standard credit card cash-advance interest rates that average around 21%.
A 400% interest rate has the ability to quickly make your debt feel impossible to pay off. It can cost nearly $100 just to borrow $500, and you’re expected to pay it back within 14 days. If you fail to pay your loan back quickly, the high-interest rate will double and triple what you owe until it becomes a mountain you can’t climb.
This is why payday loans are often considered predatory, meaning they’re unfair, misleading, or unaffordable. It’s all too easy to get trapped in a cycle of debt with a payday advance.
In addition, payday lenders have access to your bank account as a condition of your loan. You can see how that could open up a new set of problems if you get mixed up with an unscrupulous lender.
Advances with Chime and Earnin
Alternatives exist to payday loans with their sky-high rates. Chime and Earnin both provide cash advance programs that offer funds fast and even cover your overdraft fees.
Chime allows you to overdraft up to $100 without charging a fee. This is available through its program SpotMe, which simply applies your future deposit to your negative balance. You never have to pay a fee, and you can get the small hand-out you need without making a deal with the devil.
Earnin (iOS or Android) offers a similar program if you’re a salaried, hourly, or on-demand employee and you receive your paycheck through direct deposit. You can borrow up to $100 a day through Earnin without any ongoing interest or fixed fees. Instead, you pay what you think is fair and then have your remaining balance deducted from your direct deposit on payday.
The Bottom Line
Make sure you weigh the pros and cons of payday advances – especially before accepting a loan interest rate that is bound to make your financial strain worse, not better. Research Chime and Earnin and other realistic alternatives that could make all the difference to your budget.