“I just need a little more money to cover me until my next paycheck.”
The story is all too familiar. You’re low on funds, but pay day is too far away and you need cash now. You’re in a jam and considering taking out a payday loan, but before you go through with it, you may be wondering if it is really worth it.
The short answer – be very careful!
Depending on your particular situation, payday loans should probably be your last resort when you think about borrowing money. It may seem easy – you just provide a postdated check for the amount you want to borrow (plus any lender fees and interest), get your cash, and go on your merry way.
However, we all know that there isn’t such a thing as quick, easy money. Payday loan lenders have to make a profit somehow, and they often do it by charging exorbitant interest rates and fees!
Here’s an example of how it works and how expensive it can be.
Let’s say you need to borrow $200 for 2 weeks. The lender agrees to loan you the money for an added fee of $30. You write a check for $230, and the lender holds onto it as a means of securing your short-term loan. After the 2 weeks are up, the lender either deposits your check, or you can have it rolled over for another 2 weeks, tacking on an additional $30 (provided the interest rate stays the same) to the amount you owe. If you need to extend your loan twice for 6 weeks total, the cost of your initial $200 loan will become a whopping $290!
You can imagine how this has the potential to get you into trouble quickly! Since payday loans need to be paid back in a short amount of time (with such high rates), borrowers often extend their loans longer and longer, and the fees keep piling up.
In my opinion, it’s better to stay away from payday loans. Try to avoid borrowing money during emergencies by doing the following:
Develop a budget and stick to it.
You need to know how much money is coming in and how much is going out each month. Once you are clear about how much you can spend, budget wisely, stick to your spending plan, and try to cut out any unnecessary purchases.
Build an emergency fund.
A savings plan, however modest, can help you avoid borrowing money. Start putting away a little bit each month and before you know it, you will have an emergency fund! The more you save, the more prepared you will be for life’s unforeseen events.
Get a part-time job or sell things you don’t need.
Before borrowing money, decide if you can supplement your income by taking on some extra work or selling items that you don’t need. Take some time to explore creative ways to save money and make some extra cash!
There are many pitfalls for taking out a payday loan, but the biggest one is cost. While I advise against payday loans, if you must take one out, make sure you can afford to pay it back in full by your next paycheck. If you keep stretching out the loan, you’ll pay way more in interest and fees than you ever borrowed in the first place!