We’ve all had our monthly budget challenged by an unexpected expense. Maybe it was an especially challenging month for weather and your soaring utility bill reflects the damage. Perhaps a home or car repair depleted your resources for the month. While a more ironclad monthly budget or a bigger emergency fund might be in order, that doesn’t resolve your immediate issue. If borrowing from a credit card, a friend, or a relative isn’t an option, you could pawn your television or take out a payday loan.
What’s a payday loan?
A payday loan allows you to take an advance on your next paycheck to cover expenses until payday. Since most people receive a paycheck twice a month, payday loans are considered short-term forms of financing. Because your employment demonstrates your means of repaying the loan, your credit history and credit score are less of a factor.
The Controversy Surrounding Payday Loans
Payday lenders believe they are providing a valuable service, since it’s not uncommon for people in transition to have difficulty making ends meet despite having a stable income. However, many payday loan critics believe that payday loans prey on the financially vulnerable with excessive fees and high rates of interest. From the perspective of the lender, the population generally requesting payday loans are not very financially stable since the loans are predominately used to cover monthly expenses. This consumer profile suggests a higher risk for non-payment.
However, payday loan lenders are not just charging enough to cover the risk and make a modest profit. Loan fees and interest rates can equate to an annual percentage rate of as much as 500% or more, which is a fraction of what credit card issuers charge. Additionally, since payday loans are often used to cover living expenses, it’s easy for borrowers to find themselves trapped in an endless cycle of borrowing and extending these expensive loans.
But for folks who need quick cash and don’t have credit card access or a relative who is able to help, a payday loan may be the only option. Therefore, many state governments have stepped in to reduce these loan shark tactics or outlaw the offering altogether.
Not to be defeated, payday lending has now moved online thanks to financial technology. By offering payday loans online, lenders can reach more potential borrowers and try to skirt such regulations as full disclosure of the total loan costs.
What if you really need cash fast?
If you can’t tap another source for cash first, it might be less costly to make payment arrangements with your creditors so that you can still meet your other living expenses. If you still think a payday loan is right for you after considering their high cost and the risk of perpetual borrowing until your financial situation changes, make a plan for repayment before you borrow. Create or revise a budget so that you can complete the business transaction without the need to come back for more.
If you don’t allow the immediacy of your financial situation to cloud your judgement, you can resolve your money constraints without crossing the line into financial ruin.