Payday Loans: Some Helpful Tips

A payday loan can be your quick go-to solution for a temporary cash flow problem.

For example, you need to pay a bill and you’re short of $200. The next payday is 8 days away, you’ve already reached your credit card limit, and you do not want to borrow money from your family and friends anymore.

In this case, you might be tempted to rely on a payday loan.

Yes, it can help by bridging a financial gap, but it might possibly bury you deep in debt. If there are other solutions, you might want to use these to get the money that you need to pay off your bill.

But if you want to turn to payday loan, you should make sure that you understand how it works.

How Payday Loans Work

Applying for a payday loan means that you use your next paycheck as security against the amount of money that you are borrowing. The good thing about this type of loan is that it does not matter if you have bad credit, because the lender is only concerned about the fact that you have an upcoming paycheck that you can use as security.

When your application for a payday loan is approved, you will provide the lender with a postdated check that it will deposit on your next payday. Now, if the loan is applied online, you will simply authorize the lender to take funds from your bank account after you receive payment from your employer.

Most payday lenders charge a fee for every $100 that you will borrow from them. The fee varies depending on the lender, but the range is between $10 and $30. At first, the fees sound reasonable but if you get into the habit of taking out payday loans every two weeks, a $15 fee can be equal to the APR of 400 percent of a two-week loan.

Another thing worth noting is this: there are no instalment payment plans. You are expected to pay the full amount of the money you owe on your next payday. If you do not have the full amount, you might end up rolling the loan over to upcoming paydays, this will not only accumulate the fees, it will also mess up your finances.

Here’s a sample scenario: you borrow $150 and you owe $165 (principal amount plus the $15 fee). After two weeks, you are required to pay the whole amount but you can’t because you have other important expenses. You just pay the fee of $15 and roll over the loan to the next payday, and you will once again owe another $15. If the cycle keeps on, you will end up paying for the fee over and over. It might appear small at first, but if you keep rolling over the loan, you will most likely end up more than the amount that you originally borrowed.

What to Do

If you are in dire need of money, consider other options first.

  • Use your credit card – Use your credit card to cover your expenses. The interest rate is not only lower, you also have more time to pay it off. Instead of two weeks, you get a whole month.
  • Apply for an online personal loan – The interest rate for personal loans are only 9 to 35 percent, which is definitely cheaper than the 400 percent APR of payday loans. Plus, you have the option to make installment payments.
  • Look for income sources – For most experts, this is the best solution. Instead of using a loan or a credit card, it’d safer to just generate more income. Sell items in your house that you no longer use. You can also rent out a room at Airbnb, or get a second job online. There are plenty ways to earn more money so you don’t have to rely on loans.
  • Request for cash advance – This is another better alternative to payday loans. Yes, this may annoy your boss, but at least you’re not going to be charged hefty rates. Just make sure that you don’t do this regularly.

A payday loan may seem to be the quickest solution to a cash problem. But you should only use it if there are no other solutions possible.