by: Better Business Bureau
If you’ve ever needed extra cash to prepare for your next paycheck, you understand the appeal of a payday loan. Now, video ads on places like TikTok are promoting small, short-term loans to a new, young audience — and making them look cheap and easy. However, just because it looks simple doesn’t mean it is. Predatory payday lenders use the platform to make dishonest claims promising instant money with no credit checks, late fees or interest rates.
Here’s what you need to know before taking out a payday loan from a social media ad.
- Apps may not call it an “interest rate,” but it is. Many lenders who advertise on TikTok trying to circumvent regulations by creating new names for their service. By calling their interest rates a “tip” or “fee”, lenders are hoping you won’t notice the amount of interest you’ll actually be paying. Keep in mind that responsible lenders will always be willing to disclose the APR on their loans.
- Payday loans are expensive. A two-week payday loan with a $15 fee to borrow $100 translates to an annual percentage rate (APR) of almost 400%, according to the Consumer Financial Protection Bureau. That’s a huge leap even compared to a high-interest credit card, which has rates around 30%.
- Just because it’s easy doesn’t mean a payday loan is a good idea. If you’re young or don’t have access to other types of credit, you’re an ideal target for a payday lender. Unscrupulous lenders promote the fact that you don’t need a credit check or documents to get a loan. However, this facility can come at a high cost. Before applying for a payday loan, spend time researching other options.
- Not all social media ads are truthful. Payday lenders seen on TikTok can promise you instant cash. But if it sounds too good to be true, it probably is. Many companies like these have come under scrutiny for deceptive lending practices, and some may simply be after access to your bank account. Don’t believe everything you see on social media ads without doing any further research.
- Make sure you can repay the loan. With such high interest rates, many people find themselves stuck in a debt cycle. Plus, payday loans can ruin your credit if you find yourself unable to pay what you owe.
Better alternatives to payday loans
- Build a budget with an emergency fund. To create a budget so you know how much money you receive and how much you need to pay your bills. This will help you avoid needing a loan in the first place. Then set aside money each month to build an emergency fund. Then you’ll be covered even if an unexpected expense or emergency arises.
- Get credit advice. If you find yourself unable to pay your bills or caught in a cycle of debt due to a high-interest loan, get credit counseling. The US Department of Justice has a list of agencies for people looking for debt reduction help. In Canada, see this list of Canadian Not-for-Profit Credit Counseling Agencies. Also see BBB’s advice on credit counseling for more resources.
- Shop around if you need a loan. Compare interest rates, fees and late fees by reading the fine print before choosing a lender. Pay close attention to interest rates and loan rollover fees. Credit unions are a good place to take out a small loan with reasonable interest rates. Even credit card cash advances, which typically have double-digit interest rates, likely have lower interest rates than what a payday lender will offer you. See tips for choosing a bank or credit union.
- Contact your creditors if you cannot pay on time. If you realize you won’t be able to make a payment on time, don’t panic. Contact the creditor directly. Many creditors will be willing to work with you to come up with a payment plan you can afford.
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