The Payday Lending Trap

Posted by Jeremy Wascak August 28, 2017

You're in a financial bind and need some quick cash. You've seen payday loan stores all over town and think "Maybe I should try that ..."

Don't fall into that trap! Getting a loan with a payday lender could send you down a deep hole that may take years to get out of.

Here's how payday lenders catch and hold consumers:

To receive cash, you write a check to them for the amount plus the finance charge, which the lender will cash the next time you get a paycheck. They'll tell you finance charges range from $15 to $50 per $100, but won't tell you exactly what the interest rate (or APR) will be. Interest rates can run from 390 to 780%, and if your state does not cap the maximum cost, the rates can be even higher!

Here's the math to figure out what you'd end up paying by borrowing $400 from a payday lending store. There's a finance charge of $50 and a 14-day term:

  • Divide the finance charge by the amount you're borrowing. $50/$400 = .125
  • Multiply the answer by the number of days in a year. .125 x 365 = 45.625
  • Divide the answer by the number of days in the term. 45.625/ 14 = 3.2589
  • Move the decimal point to the right two places. This is your APR. 325.89%

At the end of your 14-day term, you have to pay them $450. But if you can't pay it off entirely, you'll have to roll the balance over, pay another $50 fee, as well as interest charges. At the end of your second term, your balance is almost $600, and if you can't pay that off entirely, you roll it over again. See how quickly your $400 loan can cost you thousands of dollars?

So what are some alternatives?

  • Ask your employer for an advance on your next paycheck.
  • Consider asking family members or friends for a short-term loan.
  • If you were a military servicemember, you may be eligible for short-term lending or emergency relief assistance. Contact Military OneSource at 800-342-9647, or visit for information.
  • A personal loan through Towpath Credit Union. We offer loans with low, fixed interest rates.
  • Open a low-cost, low-interest credit card through Towpath Credit Union and use it only for emergencies.

No one wants to find themselves in a financial emergency, but there are much better options than turning to a payday lender. To find out more about payday lending and learn about safer ways to get quick cash, visit the Consumer Federation of America webpage at