What Is a Payday Loan (and Why Are They So Bad?)

by Brett Weiss, Esq.

March 31, 2008

If you’re in financial problems (and even if you’re not) you’ve probably seen the ads for “payday loans.” Sounds good–if you’re short at the end of the month, just borrow a small amount of money, usually $100 or $200, for a short period of time, and then pay it back when you get paid.

So why are payday loans so bad?

It’s the interest rate. Typically, these loans will require you to pay $15 – $30 more than you borrow when you pay them back in a week or two. So if you borrow $100 for a week, you’d pay back $115. That’s not so bad, is it? Well, yes, it is.

Loans are compared based on their Annual Percentage Rate, or APR. This gives you a good rate of comparison for rates with different terms and conditions. Federal and state law require the disclosure of the APR for most consumer loans. What’s the APR on a $100 loan that you pay $115 back in a week? It’s a jaw-dropping 780% APR! Loan shark rates. It makes the default interest rates on credit cards look positively friendly.

But, you say, you still need the money. What can you do? The Federal Trade Commission, which advises against using payday loans, has some suggestions.

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.

Last modified: January 3, 2012