The cost of a loan from a storefront payday lender is typically $15 for every $100 borrowed, according to research from the federal Consumer Financial Protection Bureau. For a two-week loan, that’s effectively a 391% APR.
Online payday lenders tend to charge higher rates and often claim exemption from state rate caps. The CFPB found the median online payday loan cost $23.53 per $100 borrowed. That’s a 613% APR.
If the loan isn’t repaid in full on the first payday, a new finance charge is added and the cycle repeats. Within a few months, borrowers can end up owing more in interest than the original loan amount. The average borrower pays $520 in fees to repeatedly borrow $375, according to The Pew Charitable Trusts.
That’s why payday loans are risky — it’s easy to get trapped in a cycle of debt and expensive to get out.
Does paying back payday loans build credit?
Not usually. Most payday lenders don’t report on-time payments to credit bureaus, so the loan can’t help your credit scores or build your credit.
If you don’t pay the loans back, however, your credit can be damaged. The payday lender may report the default to the bureaus or sell the debt to a collections agency that will do so, hurting your scores.
What happens if I can’t repay a payday loan?
Lenders will continue to try to withdraw money from your account, sometimes breaking amounts into smaller chunks to increase the chance the payment will go through. Each failed attempt can trigger bank fees against you.
At the same time, payday lenders will start calling you and sending letters from their lawyers. They may even call your personal references.
A lender may try to negotiate a settlement with you for some part of the money owed. Or the lender may outsource the loan to a debt collector, which could file a civil lawsuit.
If the lawsuit is successful, the resulting court judgment against you remains public for seven years and can lead to seizure of your assets or garnishment of your wages.