The Payday Loan Trap

It’s true: A payday loan provider actually sponsored the Financial Blogger Conference that took place in Chicago not too long ago. Not only did the payday loan company sponsor, but a representative actually appeared on a panel.

I’m not going to lie.  I still think he was pretty brave to get up there and tell a bunch of financial bloggers who hate payday loans that he was a payday lender.  He did try to talk up the fact that the provider also provides prepaid debit cards, but everyone zeroed in on the payday loans.

I felt bad for the guy as he tried to explain that payday lenders provide a needed service to a certain segment of the population.

Obviously, payday loans are in demand, since there are plenty of providers that seem to be doing well enough.  While a payday loan might be just the thing to hold you over if you don’t want to be kicked out of your house, or have the power turned off, you run the risk of getting caught in the payday loan trap.

Using Payday Loans in a Pinch

I’m guilty of using a payday loan in a pinch.  While in college, with maxed out credit cards, and while waiting for the earnings from a new job, I got a two-week payday loan.  I wrote my post-dated check for the loan amount (plus the fee) and went on my way, able to pay rent and buy groceries until my first paycheck.  I never went back.  And it served as a valuable wake up call regarding my financial habits.

In a way, Mr. Payday Loan is right: There is a segment of the population that benefits (for lack of a better word) from payday loans.  These are folks who are looking for fast cash, have poor credit and don’t have other options.

A payday lender will provide credit when no one else will.

I turned to the payday loan because my credit cards were maxed out, I couldn’t get a personal loan at my bank, and I didn’t have an emergency fund.

Payday loans are tailor-made for people in that position.

Getting Trapped in the Cycle

payday loan trap

Payday loans can be useful for some, but most get sucked into the payday loan trap.

The real problem, of course, is getting trapped in the payday loan cycle.  Payday loans are fairly easy to renew.  My payday lender told me, before I walked out, that if I needed an extension, all I needed to do was come in and pay another $20 the day before my check (for $220: $200 + $20 fee) was to be cashed.  For someone in tough circumstances, I can see how much easier it would be to come in every two weeks and pay $20 rather than allow a fairly significant chunk of money to be deducted from the checking account.

You don’t have to borrow another cent; just keep coming in and pay the renewal fee for as long as the lender will let you.  Your principal will never be reduced and you will eventually pay more in interest fees than you originally borrowed.

The trap is even more difficult to escape if you keep borrowing before your first loan is paid off.  You might even be able to consolidate your payday loans and continue to renew, paying a high rate of interest and never getting ahead.

Bottom Line

Payday loans might seem like an easy solution, but it’s important that you treat the situation as temporary — and do what you can to avoid being trapped in the cycle.

The last thing you need is to rack up even more debt.

Take a look at the reasons you are in a position where payday loans look like your only option, and then do your best to adjust your habits.

Have you ever taken a payday loan?  What was your situation?

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Published or updated July 26, 2014.


  1. PRetty gutsy indeed! However, they wouldn’t be in business if there wasn’t demand.

  2. I’ve never taken a payday loan but I have considered it at one point. But the interest is ridiculous. I don’t hate payday loans because I do see that they serve a portion of the population in need. Really in the same way that any business does. I’m ok with them as long as they CLEARLY disclose the rates and terms. And most of the time, that’s not the case.

  3. Hi Miranda,

    Great post, you tactfully presented your case about a taboo subject in the personal finance world of bloggers. I’ve never used a payday loan, nor will I ever recommend one. But, as you said there are some folks that may need one. I would prefer that seek other means, though, life happens. I think your $20 example was a modest fee. I’ve known of way higher fees. Consider yourself lucky at that time.

  4. Payday loans serve a market, one that has high-risk prospects. So they charge accordingly. Regrettably, the kind of customers that need payday loans don’t have the best financial or personal habits.

  5. Rudy Beckett says:

    Every year countless people fall into the payday loan trap. Mostly because they’ve never read a word of warning like yours. There are a lot of thinks you have to be careful with such loans to avoid serious financial problems and a vicious cycle of debt spinning out of control. There’s a very good article about he dangers of payday loans here if you’re interested: It also covers some really good alternative sources of money when one is in a tight spot.

  6. Super entry, it’s a pity I only got to him now.

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