Payday Loans, also known payday advances or cash advance loans, are unsecured small-dollar short-term loans known for their simple applications, fast approval, and quick funding. If you’ve ever been in a cash crunch situation, you may have considered applying for this type of loan.
A payday loan is generally paid back in full on a borrower’s next pay date – usually within a week to a month depending on when they receive their income – and can be a convenient temporary financial solution when used correctly. Because payday loans carry higher interest rates than traditional bank loans, using these loans can make a difficult financial situation worse if used incorrectly.
Below are some general guidelines on when it may be appropriate to use a payday loan to help you determine if it’s the right choice for you.
When to use Payday Loans:
Payday loans can give you the easy access to the cash you need when unforeseen circumstances arise. No one should have to miss work because they couldn’t fix their car to get there or be without running water because they couldn’t afford a plumber until payday. Medical expenses, auto repairs, and home repairs are just a few of the unexpected expenses that life may throw your way. Should an emergency occur where you don’t have enough savings to cover the cost, an emergency personal loan could help.
Cash Flow (until your next pay date)
Things happen, and sometimes, at no fault of your own, you don’t have enough money to pay for everyday expenses like groceries, prescription drugs, or a utility bill between paychecks. Payday advances help you to carry on with your days as normal even if you are out of cash before your next payday. When you are in a situation where you would be able to pay for an expense if it were payday, you can use a cash advance loan as temporary cash flow if you can afford to repay the loan and applicable fees/interest on your upcoming pay date.
Many people use payday loans because of their convenience when they need cash right away. Although cheaper forms of credit may be available (e.g. requesting a loan from a bank or applying for a credit card), these options can take days or weeks to approve, and life's expenses might not be able to wait. Perhaps you've made a payment on your credit card that is going to take a few days to clear, or there was a payroll error at work that won't be fixed before the weekend trip you've been planning. Payday loans can be the fastest way to get short-term financing when other options are unavailable.
When NOT to use Payday Loans:
Paying off other Loans
Using short-term loans to pay off existing debt or other loans is a dangerous habit. Since the interest tends to be very high for payday advances, borrowers who take part in loan cycling often find themselves deeper in debt after taking out additional loans. If you are having trouble managing the repayment of your loans, it is in your best interest to contact the lender before a missed payment and negotiate a payment plan.
Managing Ongoing Expenses
Payday loans should not be your go-to solution to pay for recurring expenses like rent or discretionary credit card spending. If you find yourself always resorting to payday advances to cover your cost of living, you likely need a lifestyle change. Try to work on cutting back on expenses or find other sources of income to help cover your expenses.
It is important to discern between wants and needs to be financially responsible. Payday loans should never be used to pay for frivolous or needless purchases. When you take out a short-term loan, you must consider the cost of the loan with interest and fees added. If your loan costs $25 for every hundred and you use the loan to buy a $200 pair of shoes or headphones, the actual cost of that item to you increases to $250!
Before applying for a payday loan, keep in mind that it is intended for short-term use. If you are short on cash and need money quickly for only a short period, you may consider a payday loan for financial relief. Keep in mind that payday loans and other short-term loans are not legal in every state. Be sure to look for a reliable, state-licensed lender or broker to help get you the funds you need.
If you may need more time to back your loan, you should seek a longer loan term such as an Installment Loan or Line of Credit as your short-term loan solution instead. For more information on how to use these types of loans, check out MoneyKey’s Do’s and Don’ts of Short-term Loans.
Posted in: Personal Loans