When you are in an extreme financial pinch, payday loans, also called cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans, seem like a quick and easy solution to tide you over temporarily. You need to pay rent, come up with cash for a medical emergency or want to avoid a late payment on a credit card. We’ll get to why payday loans should be your absolute last resort, but let’s talk about why they seem appealing
You can get money fast.
Whether you apply online or in person, the forms are easy, straightforward, and require fairly little information. You can usually get approved within minutes, and generally, you can get your cash on the same day or the following. Sometimes, you can even get funds within the hour.
The loan process is convenient.
No appointment necessary. You don’t have to set a meeting with your bank’s loan officer or provide extensive information that may require some personal research. The forms are easy, and you can even apply for a payday loan online. And unlike traditional loans, which often dictate how you spend your money – i.e. you get a mortgage to pay for a house or car loan to purchase a car, payday loans can be used for anything: bills, repairs, credit card payments, etc.
There are few requirements.
Unlike some traditional loans, you don’t have to put up any collateral, like a house, or have a perfect credit score. The basic requirements for a payday or cash advance loan are the validation of a steady income, a checking account, and proof you are 18 years or older and that you are a permanent resident in your state.
While these factors make payday loans seem like an ideal way to get cash quickly and easily, the detrimental debt spiral they often cause, make these loans the least desirable form of borrowing.
When you take out a payday loan, you generally write the lender a check for the amount you are borrowing, plus a fee, or you give them permission to withdraw the loan amount from your bank account on your due date. When that day comes around, your loan amount is automatically deducted from your account. If you don’t have the funds to cover it, a few things will happen:
- Your bank charges you a Non-Sufficient Funds (NSF) fee, usually $38-$45
- Any time you try to write a check or pay a bill from your account, you continue to get hit with NSF fees for EACH attempt
- Your payday lender will hit you with another fee plus interest, which can be exorbitant, anywhere from 300-450%
Your seemingly simple and convenient loan has just skyrocketed to more than five times what you borrowed, and you still have to pay it all back. If you can’t, you will incur more extension fees from your lender, add more interest that you need to pay off and likely will incur more NSF fees from your bank because you gave your payday lender permission to continue making withdrawals when you signed up for the loan.
When you understand how a simple, small loan can immediately escalate out of control, the so-called advantages are no longer worth it.
Payday Loan Alternatives
Before you resort to taking out a payday loan, consider other options:
- Talk to a bank or credit union. While this process takes longer than the cash advance loan, the fees, timeline and interest rates are not as predatory.
- Ask for an advance from your employer. Talk to your human resources department or business owner; since this is an advance and not a loan, there is no interest.
- Look into Emergency Assistance. The Low Income Home Energy Assistance Program (LIHEAP) is a federally funded assistance program that helps families in managing costs associated with utility bills, energy crises, and energy-related minor home repairs.
- Borrow from friends and family. While asking for money from those you love is a difficult and awkward situation, the discomfort far outweighs the perils of a mountain of debt.
- Sell items on Craigslist, eBay or go to a pawn shop. Sell anything of value, including toys, tools, clothes, furniture, and appliances.
- Sell your car. If public transportation or carpooling is an option, give up your wheels.
- Get a roommate. Being able to split rent and utilities will allow you to save.
- Take a cash advance on your credit card. While a credit card cash advance is not ideal due to its high-interest rates, it’s still much less expensive than a payday loan.
- Set up payment plans with your other creditors. If you have medical expenses, taxes or other bills, call them and see if you can set up small monthly payments that you can afford.
- Look into a Life Insurance Loan. Some policies provide for loans if you have cash value in the policy.
- Get credit counseling. While this is not an immediate solution, talking to experts who can help you set up a budget will put you in control of your financial situation.
The Bottom Line
The disadvantages of payday loans aren’t just inconvenient; they can be absolutely detrimental and devastating to you and your family’s financial well-being. There are many more options that might take more time or willpower, but one or more of them are worth considering.
Ultimately, learning how to budget and save is a necessity in moving forward. While this process can seem overwhelming, the first step is simply writing down all your expenses, seeing where you can save and come up with a plan. There are many budgeting templates online that can get you started.
