How Payday Loans Work

Payday Loans: Hints and Tips

When you face certain financial challenges, a payday loan may be a wise and viable solution. If you face a long-term financial problem, however, you might want to consider other solutions.

  • Shop around -- there are many different payday loan companies. Make sure you aren't choosing the most expensive offer.
  • Open an emergency savings account to cover financial challenges. If your employer offers direct deposit, you may be able to deposit automatically 5 percent of each paycheck into your savings account. You probably won't even notice the difference, but the savings will be there when you need them.
  • You've heard this a hundred times: Don't borrow more than you know you'll be able to pay back quickly.
  • Take out a small loan from another institution, such as a bank or credit union. Many credit unions, in response to the financial difficulties faced by consumers who have sunk into debt by relying on payday loans, have created short-term loans with low interest rates.

credit union customer
Scott J. Ferrell/Congressional Quarterly/Getty Images
Melanie Cannon and her husband relied on credit union loans to finance their car and home purchases. Increasingly, credit unions are offering low-cost alternatives to high-interest payday loans.

  • Get an unsecured, low-interest loan from a banking institution. Since these loans are based on your credit history and do not require collateral, they are more difficult to get than a payday loan, but their rates are much lower than the rates of payday loans.
  • Talk to your credit card company about what you can do to lower your APR and/or your monthly payments.
  • APR Unlimited
    Wisconsin has the dubious distinction of having no laws governing payday lending. Theoretically, a payday loan company in Wisconsin can charge as high a fee as it would like.
    Set aside a low-interest credit card for emergency situations.
  • Take out a credit card cash advance. These rates tend to be high, though, so be careful. Plus, if you already have money charged to a card, your payments will often be credited to the lower-rate debt, leaving your high-rate debt to balloon.
  • See if you can get an extension or a more manageable payment plan to pay your bills. For example, many utility companies offer various billing plans that can help you pay your bills without going into debt.
  • Get help from a consumer credit counseling agency. These organizations can strike deals with credit card companies and other creditors to create a debt management plan to help you pay off your debt in a reasonable and manageable time period.
  • Get overdraft protection on your checking account. If you live paycheck to paycheck and payday loan to payday loan, you may find yourself incurring overdraft fees when you have unexpected costs during the month, such as the payday loan fee you forgot about when the payday lender cashed your check. These fees can put you even further into debt.

If you'd like to know more about payday loans and related topics, you can follow the links on the next page.

Related HowStuffWorks Articles

More Great Links


  • Americans for Fairness in Lending. "Payday loans." (Accessed 5/4/08)
  • Consumer Federation of America. "Alaska State Information." (Accessed 5/4/08)
  • Consumer Federation of America. "Louisiana State Information." (Accessed 5/4/08)
  • Consumer Federation of America. "State Information." (Accessed 5/4/08)
  • Consumer Federation of America. "Wisconsin State Information." (Accessed 5/4/08)
  • Federal Trade Commission. "Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives." March 2008.
  • (Accessed 5/4/08)
  • Jones, Tim. "States to payday lenders: Denied." Chicago Tribune. 3/23/08.,1,1285815.story (Accessed 5/4/08)
  • Investopedia. "Short term." (Accessed 5/4/08)
  • Investopedia. "Signature loan." (Accessed 5/4/08)
  • Investopedia. "Unsecured loan." (Accessed 5/4/08)
  • Kirchoff, Sue. "Breaking the cycle of payday loan 'trap.'" USA Today. 9/19/2006. (Accessed 5/4/08)
  • Marples, Gareth. "How Payday Loans Work - A Last Resort?" Net Guides Publishing, 2004. (Accessed 5/4/08)
  • PayDayOne. "How it works." (Accessed 5/4/08)
  • Pritchard, Justin. "What You Need to Know Now About Payday Loans." (Accessed 5/4/08)
  • State of Washington Department of Financial Institutions. "Payday Lending Report, Statistics & Trends 2004." (Accessed 5/4/08)