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If you’ve ever needed extra cash to tide you over to 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 seem cheap and easy. However, just because it looks simple, doesn’t mean it is. Predatory payday lenders are using the platform to make dishonest claims promising instant cash with no credit checks, late fees, or interest rates.
Many times, the advertisers are getting around the rules of the platform. TikTok and Meta have rules restricting ads for short term/payday loans, but some have found their way through.
Here’s what you should know before taking out a payday loan from a social media ad.
Understanding payday loans featured on social media ads
- Apps might not call it an “interest rate” but that’s what it is. Many of the lenders that advertise on TikTok try to skirt regulations by creating new names for their service. By calling their interest rates a “tip” or a “fee,” lenders hope you won’t notice just how much interest you’ll actually pay. Keep in mind that responsible lenders will always be willing to disclose the APR on their loans.
- Payday loans are costly. A two-week payday loan with a $15 fee to borrow $100 translates to an annual percentage rate (APR) of almost 400 percent, according to the Consumer Financial Protection Bureau. That’s a huge jump from even a high interest rate credit card, which have rates of about 30 percent.
- Just because it’s easy, doesn’t make a payday loan a good idea. If you are young or have no access to other types of credit, you are an ideal target for a payday lender. Less-than-scrupulous lenders promote the fact that you don’t need a credit check or any paperwork to get a loan. However, that ease can come at a high cost. Before you pursue a payday loan, spend some time shopping around for other options.
- Not all social media ads are truthful. Payday lenders seen on TikTok may promise you instant cash. But if it sounds too good to be true, it probably is. Many companies like these have faced 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 further research.
- Be sure you can repay the loan. With such high interest rates, many people find themselves stuck in a debt cycle. In addition, payday loans can ruin your credit if you find yourself unable to pay back what you owe.
- Know local laws about payday loans. Payday loans are illegal or heavily regulated in many areas. To find out what laws apply to payday lending in the U.S., contact your state consumer protection agency or Attorney General's office. It is important to understand whether the loan terms being offered to you are lawful in your state. In Canada, most provinces require a payday lender to have a license; see the Financial Consumer Agency's information on payday loans.
Better alternatives to payday loans
- Develop a budget with an emergency fund. Create a budget so you know how much money you have coming in and how much you need to pay your bills. This will help you avoid needing a loan in the first place. Then, set aside some cash each month to build up an emergency fund. Then, you will be covered even if an unexpected expense or an emergency comes up.
- Get credit counseling. If you find yourself unable to pay your bills or if you are caught in a debt cycle due to a high interest loan, get credit counseling. The U.S. Department of Justice has a list of agencies for people looking for debt reduction asistance. In Canada, see this list of Canadian nonprofit credit counselling agencies. Also, check out BBB's tip on credit counseling for more resources.
- Shop around if you need a loan. Compare interest rates, charges, and late fees by reading the fine print before you choose a lender. Pay close attention to both 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 usually have interest rates in the double digits, likely have lower interest rates than what a payday lender will offer you. See tips on choosing a bank or credit union.
- Contact creditors if you can’t 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 that you can afford.
For more information
Read the BBB Tip: Payday Loans for more considerations on working with payday lenders. You’ll find practical tips in the BBB Tip: How to shop for financial services as well.
If you feel a payday lender has committed fraud or taken advantage of you, file a complaint on BBB.org and with the Federal Trade Commission.