Payday loans have, since their inception, proven rather controversial in the financial world. Relying on high interest rates to make money, payday loans can quickly spiral out of control if the borrower fails to repay the loan in a timely fashion – and in doing so they fall prey to those same high interest rates, digging an even deeper hole of debt than they’d previously had.
Does this make payday loans the worst idea in the world? No, not really – though you need to know how to handle one before you run out and get it.
First, an explanation. Payday loans are so named because they’re designed to get you from one payday to the next. The loan is short-term, often lasting only a few weeks (or even days), and will typically be paid off by your next paycheck. They help deal with the rigors of paying for groceries, handling bills and pushing aside any unforeseen catastrophes that suddenly crop up. Typically you apply for the loan in a brick and mortar institution online, provide some employment details (no credit history, usually, which makes these loans rather attractive) and have the money wired straight to your bank account. At the time of maturation you either pay off the loan yourself or it’s done automatically via a post-dated check.
Pretty straightforward, in other words. But does that make a payday loan good for you or not? Let’s find out.
First, always first, you need to remember that these loans have extremely high interest rates. They need to be high, as the company would otherwise not make any money off the loan. If you go over the payment date, however, that interest keeps building, and much more quickly than it would on other loans. If you can’t repay the loan on time, don’t get a payday loan.
To that end, you shouldn’t get a payday loan if you’re irresponsible with money. Let’s say you know you’re going to have enough money by the end of the month and are confident you can repay the loan – but are then tempted to buy something. A TV, perhaps, or a bundle of movies. That money should be going towards the loan, but because it isn’t you’ll run into the same debt problem and have to pay a lot more than you got out of the loan in the first place. Use a payday loan for something you absolutely must have done and nothing else.
Second, you need to know if payday loans are legal in your area. They aren’t everywhere, and though you won’t have the problem of accidentally going to a physical lender online ones can still prove tempting. Don’t get in trouble with the law.
Third, you need to be cautious about the lender you’re using. There are plenty of legitimate payday loan companies out there – and for every three or four good ones, there’s a scam artist waiting to filch your money. Beware empty promises of rates that are far lower than those of the competition, as real companies will generally all stick to the high, legislated amounts for payday loans. This is especially true of online companies. Check the company out a bit before committing.
And, fourth, know now that you’re going to pay a fair amount on the loan almost regardless of how quickly you pay it off. Speed comes with a price, and the high interest rates will ensure that these companies get a big slice of your paycheck every tie. In the long run it’s probably a better idea to look elsewhere for your financial needs – though every now and then you’ll probably have to make the sacrifice. Avoid doing it on a monthly basis, however, as you’ll be losing a lot of cash for no good reason.