How Payday Loans Measure Up to Other Financial Tools

Payday loans -- short-term, high-interest unsecured loans -- generally require borrowers to offer little or no information about their credit history or financial status. However, payday lenders do require the borrower to provide some form of payment when he takes out the loan, usually a bank account number or a post-dated check. Borrowers may also face a number of risks not associated with other financial loans, such as high fees and interest rates.

Interest Rates

According to the Consumers Union, some payday loan lenders charge consumers an annual rate of interest equivalent to almost 400 percent, so the borrower can quickly owe an amount many times that of the original loan. Other kinds of loans command interest rates nowhere near this high. Credit cards, for example, generally will not charge a rate higher than 30 percent, even when the borrower has defaulted on payments. Many other loans, particularly secured loans, are available at interest rates much lower than this.

Time Periods

Payday loans generally must be paid back over a short period of time. Most loans are issued for only a few days or, at most, a month. Generally, a person will be required to pay back a payday loan all at once. By contrast, with other loans, a person may be allowed to pay back the loan amount over a longer period of time, usually in installments. Payday loans can usually only be paid in installments if the loan is in default and the person owes a significant amount in penalties and interest.

Penalties

Many loans carry penalties. For example, when a person fails to pay the minimum amount due on a credit card, he will often be assessed a fee of up to $35. However, with payday loans, the penalties can often be far higher than with other types of loans. Not only will the individual often be charged a late fee for failing to pay back the loan on time but may face additional fees for bouncing a check or "rollover" fees for extended delinquency.

Considerations

According to the Consumers Union, individuals should seek out other forms of financing before choosing to take out a payday loan, due both to their high interest rates and their potential for excessive fees. An individual has a number of alternatives to payday loans, including advances from employers, withdrawals against a line of credit and even loans from friends or family. These alternatives carry less risk of sending the borrower into an unmanageable level of debt.