With the economy nearly in shambles, many individuals these days find themselves taking out loans to cover their expenses. Payday loans are becoming more and more popular, as they are relatively easy to obtain (all you really need is proof of income), and can help you out of a jam in many cases. If you are wondering about the usefulness of payday loans, you have come to the right place. These short-term (usually 1-2 weeks maximum) loans are perfect for dealing with many unforeseen expenses, but terrible for making superfluous purchases. Because of their short maturity term, payday loans have higher interest rates than many other types of loans. They are designed to help people who need cash quickly, and can pay it off with their next paycheck.
Studies show that the number 1 reason for taking out a payday loan is to pay for unexpected expenses. Say your car breaks down, and you don’t have the money in savings to fix it. For most people, having a working car is absolutely essential. In this situation, a payday loan would be an excellent option. Or, for example, say that a family member has health issues, and you’d like to go and see them. Plane tickets are not cheap, especially on short notice. But in most cases, seeing your relative is well worth the expense. This would be another time where a payday loan would come in handy.
Payday loans can also be useful for avoiding fees. Say you owe money to several companies for your bills. Your bank account is empty, and your payday is not for another week. If you don’t pay your bills, late fees will be charged and interest will start to accrue. Overdrawing your bank account is an option, but that will simply add more fees onto the pile. If you cannot borrow money from a friend or coworker, then your best option is to take out a payday loan. In this situation, paying the interest on a payday loan can actually save you money, and keep your credit score where it is.
When not to use a payday loan
Some people are so enticed by payday loans that they use them to buy unnecessary or superfluous items. This is the worst way to use a payday loan. Not only are you spending money that you don’t need to be spending, you are spending even more than the unnecessary item costs. Plus, you are putting yourself in debt. While you could argue that the debt is temporary, what happens if something else comes up? If you already have a payday loan taken out, and you’ve already spent it on frivolous items, you most likely will not be able to obtain another payday loan. So, if your car breaks down or another expense pops up, your options will be very limited. Before you take out any sort of loan, really sit down and consider what you are about to pay for with the loan. If it is a necessity, go for it. If it is not a necessity, wait until you have the money saved up to purchase it.
Lastly, keep in mind that most payday loans charge a flat fee per X amount of dollars, instead of using a set interest rate on the entire amount. Generally this flat fee is between $10-$30 for each $100 you borrow. Because of this, payday loans are usually best for smaller amounts. If you need $500+, it may be worthwhile to look elsewhere for a loan, such as a local credit union or even a private lender. For amounts under $500, payday loans make sense and are the best choice. However, if time is of the essence, an instant cash advance will be your only option as getting a loan from a bank may take weeks.