Here’s Why College Students Should Avoid Payday Loans

College students are known for scraping by on a tight budget, which is why taking out a payday loan could send them spiraling into serious debt.

How do you do, fellow college students! Wow, it’s so exciting to be back on campus and/or arriving on campus for the first time. Isn’t it great that we get to go to the Big Game and cheer for our beloved school Mascot! College is so totally tubular, except for all the studying and/or exams and/or crippling existential anxiety and/or gnarly bros …

Look, we can’t keep doing this. Okay? It’s been a while since we’ve been in college—a bit longer, in fact, than any of us would care to admit. Even the meme we referenced to open this piece is something that actual college kids today probably don’t understand. We’re so old.

And yet! Those extra years upon this earth have granted use some additional wisdom we can impart to today’s youths. So when we saw recently that one in three college students were turning to payday loans in order to cover their expenses, we leaped into action.

College is about learning, which often means learning from your mistakes. But with payday loans, we’re going to go ahead and advise you to not make that mistake at all. Here’s why …

What is a payday loan?

Payday loans are a type of small-dollar no credit check loan with average loan amounts of only a few hundred dollars. They are aimed at people who have poor credit scores, the sorts of folks who are locked out from traditional lenders like banks. Payday lenders do not check a person’s credit score when they apply, and often have a very low-bar for approval—a convenience that comes with significant downsides.

These loans get their name from their short payment terms, which average only two weeks. (They’re also sometimes referred to as “cash advance” loans.) Supposedly, payday loans are only meant to last the borrower until they get their next paycheck, at which time the loan is paid back in full, often through a post-dated check or an automatic debit of the borrower’s bank account.

In reality, however, things are never that simple. Take the interest rates for these loans, which can seem reasonable, at first, but are actually vastly more expensive than standard personal loans—and even other, more reasonable types of bad credit loans. An average interest rate of 15 percent for a two-week online loan sounds just fine, but that translates to an annual percentage rate (APR) of 391 percent!

The realities of payday borrowing are much bleaker.

Of course, why would anyone worry about the annual rate for a loan, when it’s going to be paid off in only two weeks? Well, that’s where the reality of payday borrowing really comes into focus. If most people were able to pay off their payday loans in only two weeks, that would make them a pricey but relatively harmless form of emergency financing … which is not at all the case.

The truth about payday loans is that many borrowers find them extremely difficult to repay on-time. Even when the due date is set for the date of the borrower’s next paycheck, repayment can leave borrowers struggling to pay all their other bills. Many college students are on a tight budget as is, something that a payday loan could blow up to kingdom come.

According to a study from the Consumer Financial Protection Bureau (CFPB), over 80 percent of payday loans are either rolled over or reborrowed. This means that the borrowers either extended their due date in return for more interest (rolled over) or they paid off their first loan and then immediately took out another one (reborrowed). Unlike installment loans, payday loans have to be paid back all at once, which can actually make them harder to repay.

According to that same study, the majority of payday loan borrowers took out a whopping 10 payday loans per year and spent 199 out of 365 days in debt. When you look at how payday loans are actually used by borrowers, you quickly see how dangerous they can be and how easily they can trap borrowers in a predatory cycle of debt.

Broke college students have other options.

If you’re currently enrolled in college, you’re probably not rolling in dough. And that’s okay! We wrote a piece recently about how broke college students can save money. Some of the highlights from that piece include:

Rent out your textbooks: The great thing about college textbooks is how you spend hundreds and hundreds of dollars for them and then you use them for one class and then never touch them again. Instead, rent out your textbooks to other students, which will save them money versus the full-cost and give you the chance to earn some much-needed cash.

Learn how to cook: Even with college meal-plans, it’s way too easy for college students to run through any and all available funds by relying on takeout food. Learning to cook will let you stretch your food budget much further. It might even allow you to switch to a less expensive meal-plan, which frees up even more money for you to save.

Get a part-time job or side hustle: Speaking of earning extra income, the best way to do that is to get a job! Even if you don’t have a work-study through your school, there are almost certainly employers in your area who are used to hiring college students. Or you could get a side-gig, like driving for a rideshare or walking dogs!

No matter how you decide to cut costs or bring in a little extra, the best thing that you can do is to save that money and build up an emergency fund. Even if you have the option of asking your parents for money (which is never fun), becoming financially independent will be a great habit to have once you graduate.

You don’t have to take out a payday loan (or an equally dangerous title loan) to learn a hard lesson about balancing your finances; handling them well in the first place will do just fine. Want to learn more about saving money? Check out these related posts and articles from OppLoans:

What are your best strategies for saving money as a college student? Let us know! You can find us on Facebook and Twitter.

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