Believe it or not, the average payday loan interest rate is a whopping 391 percent according to Pew Research.
The next highest interest rate for consumer debt is 17 percent for credit cards followed by 10 percent for personal loans.
Therefore, if you have revolving credit card debt or payday loan debt, it's highly recommended to apply for a personal loan to pay off your higher interest rate loans.
The best place to apply for a personal loan is with Credible. San Francisco-based Credible is an online lending marketplace that pre-screens highly qualified lenders to compete for your business. All you've got to do is fill out your information and in three minutes, you'll be able to compare and contrast various personal loan rates.
What Are Payday Loans And How Do They Work?
Almost 12 million Americans use payday loans each year, paying some $9 billion in loan fees. You are clearly not alone if you have a payday loan you're working down yourself.
Payday loans are short-term loans with extremely high interest rates that are targeted to be repaid by your next payday.
If you do not pay the loan off by the next payday, as many lenders hope, you will be charged an even higher loan interest rate that could easily trap you in a vicious debt cycle.
Many payday lenders don’t even check your credit report, which is why the average credit score for many payday borrowers is below 680. Payday lenders will want to see a pay stub or income source of some kind, as they still want to ultimately get paid back.
Because the average annual interest rates on payday loans is well over 100 percent, roughly 80% of borrowers find themselves unable to pay the entire owed amount back at the due date. As a result, they roll over or renew their loans with a higher interest rate and never end up getting out.
Here's an even scarier fact. Roughly 12% of borrowers of payday loans ask for an extension 10 times or more!
Here are some more facts about payday loans you should know:
- The average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375.
- Payday loans are usually due in two weeks and are tied to the borrower’s pay cycle. Payday lenders have direct access to a borrower’s checking account on payday, electronically or with a postdated check. This ensures that the payday lender can collect from the borrower’s income before other lenders or bills are paid.
- A borrower must have a checking account and income to get a payday loan.
- Average borrowers earn about $30,000 per year, and 58 percent have trouble meeting their monthly expenses.
- 7 in 10 payday loan borrowers use them for regular, recurring expenses such as rent and utilities, a big no no.
- Payday loans are available in 36 states, with annual percentage rates averaging 391 percent. The other states effectively prohibit these loans by capping rates at a low level or enforcing other laws.
- The average payday loan requires a lump-sum repayment of $430 on the next payday, consuming 36 percent of an average borrower’s gross paycheck. However, research shows that most borrowers can afford no more than 5 percent while still covering basic expenses.
The Best Ways To Pay Off Your Payday Loan
If you have a payday loan, here are several ways to pay off your payday loan.
1. Get A Personal Loan
You may have bad credit. You may have a relatively low income. But I'm pretty certain that your payday loan is the most expensive debt option out there given the average APR is 391%!
Meanwhile, the average personal loan rate from a reputable company is closer to 10%. See the chart below.
Check out a reputable online personal loan marketplace like Credible, which has pre-vetted 10 qualified personal lenders to compete for your business. Input your needs and you should be able to get real quotes in under three minutes.
Even with terrible credit, you should be able to get a personal loan with an interest rate of under 30%. 30% is still very high, but it is much lower than a payday loan interest rate of 391%!
2. Get A Payday Alternative Loan (PAL)
Credit unions offer these loans that range between $200 and $1,000, with terms between one and six months. Up to three such loans can be granted to a borrower during a six-month timeframe.
One of the major advantages is that credit unions typically charge an application fee of no more than $20 and interest at an annual rate not to exceed 28%. It’s also possible the credit union won’t even perform a credit check.
The easiest way to get a PAL is to walk into your closest credit union, explain your payday loan situation, and ask if they have the PAL option.
3. Borrow From Your Credit Card
Although I absolutely hate using a credit card to withdraw cash, anything is better than paying a payday loan interest rate.
The average cash advance interest rate is about 24 percent, or 7 percentage points higher than the national average rate charged on consumer credit cards. Further, you have to typically pay a 5 percent withdrawal fee, or $10, whichever is greater. In other words, if you get a $500 cash advance to pay off your payday loan, you will have to pay $25 for the money + 24 percent a month.
But again, paying $25 + 24 percent is much better than paying hundreds of percent for a payday loan! If you want to get a credit card, get a great cash back rewards credit card that pays you cash and not the other way around.
4. Borrow From Family Or Close Friends
Borrowing from family and close friends is tough because you have to swallow your pride and admit you messed up or are in a bad place. That said, a good family member or friend who has the funds can get you out of your payday loan quick, perhaps without even charging you interest.
A lot of good family members and friends may also be willing to charge you a 0% interest rate.
Just beware that if you take advantage of your family and friends, you might lose them, forever. If you don't lose them, you may create a perpetually awkward situation that will hurt your relationship.
When you ask a family member or friend for money, it's best to write out your explanation, and highlight concrete steps on how you plan to pay them back and a promise that you won't get into any more debt.
5. Sell Off Your Belongings For Cash
Look around the house. Surely you have a ton of stuff that's just sitting around unused. Why not sell them on Craigslist or eBay to raise some cash, pay off your debt, and declutter your house? It's a triple win!
Spend 30 minutes aggressively gathering things you haven't used in over a month. Chances are high you won't miss them at all. Use the Konmari method to organize your life.
I'm looking around my house right now and I see about 30 t-shirts, 4 suits, 10 new shoes, and probably 80 books I could try and sell and raise over $1,000 online.
6. Take On Side Hustles
In the internet age, nobody should just depend on one job to survive. We should all have multiple side jobs to generate income on top of our main job.
My side hustle so happens to be writing about personal finance since 2009 on Financial Samurai My side hustle grew so much that by 2012, I had the confidence to walk away from a multiple-six figure job. I highly recommend everyone start their own website to at least brand themselves online.
You can driver for Uber or Lyft, assemble furniture on TaskRabbit, deliver groceries on Postmates, mow your neighbor's lawn and more. There are an endless amount of things you can do to earn extra income.
The Average Interest Rate For Payday Loans Is Too High
The average payday loan interest rate of 391 percent is way too high. If you get a payday loan, chances are high, you might ever get out.
You could file for bankruptcy if you feel there is simply no way out. But then your credit would be ruined for seven years and you may have a difficult time finding a place to live and getting a job.
The easiest way to get out of a payday loan is to check for a personal loan online for free. Anything is better than paying the average payday loan interest rate. Once you know your options, then you can methodically go through the other choices.
Once you're done paying off your payday loan, never get one again. Be 100% focused on saving and investing for your future. Subscribe to Financial Samurai and make it your mission to achieve financial independence sooner, rather than later.