When you’re strapped for cash and an unforeseen emergency occurs, you need quick access to funds. If you have a credit card, you can get what you need with no problem as long as you’re not too close to your credit limit. But if you don’t have a credit card or you don’t have good credit, it’s not that easy.
This is where payday loans come in. A payday loan is a loan that requires the borrower to write a post-dated check for the amount to be borrowed, plus a finance charge. The lender then gives the borrower the money, and when the borrower gets paid, the check is cashed. There is no credit check, and the only requirements are an active checking account and a regular source of income.
So what’s the catch? There are a few:
* Payday loan companies charge insane amounts of interest. The loans they make have an average APR of 400%, but some charge as much as 5,000% interest. And you though interest was high on credit cards!
* If you can’t afford to repay the loan on your next payday, you must notify the lender right away so that the check will not be cashed. If you fail to do so and the check bounces, you could be charged fees by both your bank and the payday lender.
* If you must extend a payday loan, you’ll have to write another post-dated check and pay another finance charge. This can turn into a vicious cycle, and you could end up paying more in interest than you actually borrowed.
Because of the high interest, payday loans are illegal in some states. Other states allow them, but due to strict regulations, payday lenders may choose not to operate in some of these states.
When Should I Get a Payday Loan?
If possible, it is best to avoid payday loans altogether. If you can borrow money from a friend or relative or postpone the expense until after you get paid, you’ll be much better off. But there are certain situations in which a payday loan can be helpful.
Some people take out payday loans to get their cars repaired. If it’s an urgent repair and you need the car to get to work, it’s probably better to go ahead with the payday loan if there is no other alternative. Or if you need to see a doctor and do not have insurance, a payday loan could get you the medical care you need. But if your situation is not an emergency like these, there are probably alternatives that are not as expensive or risky.
Before you get a payday loan, it’s important to consider all of your alternatives. If the expense can wait, or if you can get the money some other way, you’re better off leaving payday loans alone. And if you do end up getting a payday loan, it’s important to pay it off as quickly as possible. If you don’t, it could get you in more financial trouble than you’re already in.
