Payday loans are short term loans with very high interest rates. In fact, the Consumer Financial Protection Bureau (CFPB) cautions that payday loans typically charge an APR of around 400%. Unfortunately, since the costs of payday loans are typically represented as the fee you pay to borrow, many people don’t realize how high the effective interest rate is.
When you borrow money at such a high cost, it can be almost impossible to pay off what you owe and not get into debt. If you take a $ 100 loan with a $ 30 fee and have to pay $ 130 off the next payday, you might have a hard time finding the money. And if you to do pay off, you could run out of money again before you get your next paycheck, forcing you to take out another payday loan.
Due to the huge expenses and short payday loan repayment term, many people end up having to take out another payday loan to pay off their original loan on time. This can happen over and over again, until you become trapped in a cycle where you almost constantly have at least one payday loan.
Obviously, all of this means that taking out a personal loan is very bad for your finances. Indeed, the decision to take out a personal loan can have financial consequences that reverberate throughout your life for months and that even put you on the path of bankruptcy if you cannot break the cycle. borrowing.
Having said that, you may be wondering if there are any circumstances under which it is okay to take out a payday loan. This guide will help you decide.
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Explore all your other alternatives before taking out a payday loan
Before even considering a payday loan, you should first explore all other alternatives, as almost any other type of loan will likely end up costing you less than a payday loan. Here are some of the other types of financing you should consider:
- Alternative payday loans: These are short-term loans available to members of credit unions who need quick access to small amounts of money. The fees are capped and you are limited in the number of alternative payday loans you can take out per year. These loans are much more affordable and are a much better way to borrow than payday loans if you have a short term financial need.
- Credit card: If you can use a credit card to pay for essential purchases instead of a payday loan, better. In most cases, this is true even if you end up having to take a cash advance on your credit card – although cash advances come with higher fees and a higher APR than standard purchases. on most cards. It is true that interest on credit cards is very expensive, but the interest you will pay on a card is not even close to what you would pay on most payday loans.
- Personal loans: Personal loans have lower interest rates in most situations than payday loans or credit cards, and they can also provide a fixed repayment schedule. If you can pay off your personal loan on a fixed schedule with an affordable monthly payment, that’s much better than having to repeatedly take out payday loans. It can also be better than getting stuck with higher interest credit card debt that you could pay for decades if you only pay the minimum.
You should also consider borrowing from friends and family, selling items you don’t really need, temporarily fending for yourself, and exploring all other possible sources of finance before you take out a payday loan. . For example, if you think you need a payday loan to cover an essential medical bill when you take your sick child to the doctor, you should first ask your caregiver if you might qualify for a health care plan. payment.
What if you had exhausted all other alternatives?
If you have absolutely no other way to find money and it is absolutely imperative that you have the money at your disposal, a payday loan could be your best and only option. But you have to go into the transaction with your eyes wide open and an awareness of the huge financial movement you are making.
Payday loans should not be used to cover things that are not real emergencies. For example, if you need a payday loan to cover an auto repair because you absolutely must have a vehicle or you will lose your job, it may be a good idea to take out the payday loan. Yes, it will temporarily worsen your financial situation, but the consequences won’t be as bad as losing your job could be.
However, you need to consider whether a payday loan will provide a long-term solution or if you’re just delaying bigger issues. If you are about to be evicted and are considering a payday loan to pay your rent, consider whether the loan will actually help you keep your home. If your payday loan could cover your rent for a month but you still couldn’t afford the rent for the next month, you would find yourself evicted anyway – and then you would be without your home. and no longer in debt. As long as you have somewhere else to go, the payday loan may not be worth the month’s stay.
Payday loans are still a bad way to borrow
To recap: the only situation where this type of borrowing might make sense is if you have no other alternative, a payday loan is the only way to avoid a bigger financial disaster, and you’re not just delaying. the inevitable with a payday loan. In all other situations, you should look for a more affordable financing solution or avoid the borrowing period if you cannot find a profitable way to do it and the debt will only make your finances worse in the long run.