When money is tight and it's getting close to the end of the month, a payday loan can seem like the perfect solution. It gives you enough money to get you through until your next paycheck. Unfortunately, this can be too simplistic, and using payday loans to cover up a bad financial situation can make things even worse because of the high fees that come with small, short-term loans.
The fees for a typical payday loan are about 25% of the amount borrowed, and the loan must be paid back within a month or so. This means that the APR can be very high, even though the actual dollar amount may seem small. This means that people who want to borrow money should think carefully about whether or not they really need one, since there may be other options that are better.
The biggest risk of payday loans is the temptation to use them to pay bills and live a little bit better than you can afford. It's easy to get stuck in a situation where you have to take out a new loan every month to make ends meet and pay high fees every time. Once you're in the trap, it's hard to get out without something big happening. So what are your options?
If the main reason you need a loan is to pay a credit card bill or other bill, you may be able to talk to your creditor and set up a repayment plan that gives you enough breathing room to avoid needing a loan. Even if you can't come to a deal, the fact is that if you miss a payment, you'll only have to pay a late fee once instead of the monthly fees you'd have to pay with a payday loan trap. Breaking a credit agreement isn't usually a good idea, and it will hurt your credit score, but it's something to think about if all else fails.
Find a credit union in your area is a smarter way to get out of the trap from a money point of view. These non-profits will lend you money at a very low interest rate and give you advice and help to get your finances back in order. Long-term, they can also help you build a "rainy day" fund by giving you flexible savings plans.
You can also get a cash advance on your credit card, which, while expensive, lets you pay it back over a few months and ends up being cheaper than a few months of payday fees. Debt consolidation or small consumer loans can be cheaper options, but you should only use them as part of a larger plan to fix your finances and budget.
So, are payday loans bad in every way? No, not at all. In a real financial emergency, they can be a lifeline, and as long as they aren't renewed, they can be cheaper in the long run than borrowing money at a lower rate but for a longer time. Just don't get stuck in a situation where you have to take out a new loan every month to pay for basic living costs.
