The following post is by MPFJ staff writer, Chonce. You can read more articles by Chonce over at her personal blog, My Debt Epiphany. Enjoy!
If you find yourself in a financial bind, the idea of taking out a payday loan may come up. Payday loans are short-term loans often with high interest that a borrower is often expected to pay back when they receive their next paycheck(s).
There are many payday loan lenders all throughout the country and you may even see some stores in your neighborhood offering these services. However, payday loans are often the worst type of loan to get and not a real solution to your financial problems which is why I always advise against them.
The Trouble With PayDay Loans
Payday loans appeal to low income earners with average or poor credit. Ultimately, they only truly benefit the lender. Lenders get to loan you money and collect interest on it while you stress out over paying them back. If you take out a payday loan, you may feel a brief sense of relief while you pay for the expenses you have, But when it’s time to pay back your loan and you have to cover interest as well, you always loose money.
Payday loans have some of the highest interest rates typically around 400% which is outrageous. If you have to borrow $300, you’d have to pay back that money along with almost $100 in interest meaning you lose money during your next pay period. If you can’t pay back the loan quickly, it can get worse which makes these loans not worth it in regards to the convenience they do provide.
To avoid having to consider a payday loan, try out these options instead.
Start Building Up Your Emergency Fund
When things are going well financially or you have a little extra money at the end of the month, put it into a savings account for a rainy day. It’s best to save and build your emergency fund consistently no matter how good or bad things are going and don’t stop until you get your account to a reasonable number that you feel comfortable with.
Payday loan lenders take advantage of borrowers by offering high interest rates because they know a payday loan is an absolute last resort and the borrowers don’t have any savings to fall back on.
Even if you can only set $25 or $50 aside each paycheck, it’s a start and will come in handy should you ever need it.
Do Some Extra Work
If you don’t have much in your savings account and an emergency or unexpected expense pops up, consider doing some extra work to earn the money you need. Ask your employer if you could pick up some overtime, ask friends and family if they need help with anything or need a babysitter, offer to help someone move, or apply for gigs online on sites like Craigslist.org, and Upwork.com.
There are so many things you can do to earn some extra money quickly. Worst case scenario, consider selling something you no longer want or need for quick cash. Odds are, you have something lying around your home that you can do without. Sell that item online, at a garage sale, or utilize your local area’s online buy, sell, and trade group.
Change Your Budget Around
When options are slim, you can always change your budget around so you can be able to round up the extra money you need. If you reach out to your utility companies, landlord/mortgage company, other lenders etc. and ask for an extension on your monthly payment until your next payday, they may work out a verbal or written agreement with you.
Shuffling around the due dates for certain expenses can really help you avoid a high-interest payday loan.
Use a Credit Card
While I don’t like advising people to use a credit card to cover extra expenses they can’t handle, credit card interest rates are much cheaper than payday loan interest rates. If you have a smaller purchase that you need to make, I’d definitely recommend making it on a credit card and paying off the balance as quickly as possible.
If you have a credit card with a temporary 0% APR, that might be an option that is well worth it too. However, if you’ve maxed out your credit card or don’t have one, I wouldn’t recommend signing up for a new credit card just to pay for expenses you truly can’t afford.
Also, if you have bad credit, this option may not apply to you and you will have to try some of the other alternatives along with preventative methods like building your emergency fund while you work on improving your credit.
Once You Start Using Payday Loans It’s Hard to Stop
Once you get started with payday loans, it’s very easy to get sucked into the debt cycle. You start by paying back your loan along with the extra interest charges. Since you paid extra money due to interest, your cash flow may be offset for the following month causing you to be short on money for savings and regular expenses. This can prompt you to take out an additional payday loan to help make ends meet for the time being. The vicious cycle can continue again and again and wastes a lot of time and money while causing you unwanted stress.
Your best option is to build up a comfortable savings buffer and avoid taking out a payday loan at all costs by utilizing the alternatives mentioned.
How about you all? Have you ever had to take out a payday loan? How are you avoiding the option of having to take one out in the future?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/foilman/5640782502/in/
