If you’re sincerely asking this question, you’ve probably run into a financial tight spot for which you’re trying to find an expeditious solution. At face value, payday loans sound like a good deal. You write a check for the amount you need to borrow — plus the interest — and date it for your next payday. When the appointed day rolls around, the lender cashes the check, and all is well.
That’s pretty much all there is to it. So, should you get a payday loan?
Well, It Depends
If you have no other choice and you absolutely know you will have the money to repay the loan when it comes due — and if it won’t put you in a situation in which you’ll be so low on cash between paydays that you’ll need another loan to get to the following payday — then yes, maybe it’s okay.
That’s a lot of “ifs” though.
And, should any one of them come into play, you could find yourself trapped on a never-ending treadmill of debt at an insanely high rate of interest. Payday loan amounts generally range from $50 to $1,000. While fees also vary according to state laws, a typical deal entails paying $15 per $100 borrowed for a loan. While borrowing $100 and paying back $115 might sound pretty reasonable, this works out to 400 percent interest when you factor it into an annual percentage rate.
Meanwhile, the average APR on a credit card cash advance is 23 percent.
The Worst-Case Scenario
Let’s say you take a payday loan of $300, for which you agree to repay $15 for every $100 you borrow. This means you will have already spent $345 of your pay when your next check comes — before you’ve done anything else.
Now, let’s say that puts a serious dent in your pocket and you can’t afford to pay it all back. The lender says, ”Hey, no problem, just give me the $45 and we’ll roll the $300 over to your next payday.”
That $300 loan now has you on the hook for $390 — the $300 you originally borrowed, plus the $45 in interest you owed on it and the $45 in additional interest you just agreed to pay to get the lender to chill until your next payday.
The more this happens, the more you’ll owe; and it can get up into the thousands of dollars very quickly — especially if you’re already having money problems.
By the way, if they put the check through and it bounced, you’ll also be looking at overdraft fees from your bank.
There Are Alternatives
Before you go this route, see if you can work out something with the person you already owe at better terms. Depending upon the nature of the emergency, you might find people willing to be lenient with you if you can assure them payment will be forthcoming.
If you’re already having trouble making the minimum payments on your credit cards or other unsecured debts, working with an organization like Freedom Debt Relief to resolve those issues could free up enough cash to save you from going this route. Further, if you’re already in trouble with a payday lender, they can sometimes help negotiate a better repayment situation to help you get off the treadmill.
Another consideration is a consolidation loan from a trusted brand like FreedomPlus or Consolidation Plus if your problem is related to having too many debts to handle effectively. This will roll all of your debts into one affordable payment, which will give you more liquidity.
Another possibility could be getting a loan from a friend. Don’t be embarrassed, everybody has cash flow issues from time to time. Getting a part-time job to help make ends meet and selling off unused items around the house can help too. All of these options should be considered before you get a payday loan.