Destroy Your Debt

What’s the Deal with Payday Loans?

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Payday Loans

If you’re looking for a shortcut to wealth, stop looking because there is no such thing. Certainly not via a payday loan.

I get a lot of need money now related questions, hence The Need Money Now Strategy. Unfortunately, it’s because a lot of people have gotten themselves into some degree of trouble. Maybe a mortgage payment is due, and you’re short cash, or you don’t want to be late on your electric bill. Whatever the reason, it’s important to note that I don’t condone payday loans.

That said, I suppose there are a time and a place where they could get you out of a serious jam (it better be serious).  What I want to do in this article is explain what a payday loan is, why they aren’t so great and how sometimes they can be useful.  I’m also going to give you some alternatives so if you don’t meet the narrow criteria for actually needing a payday loan (they accept most everyone) you can sign up for something less painful.

What is a Payday Loan?

Simply put, a Payday Loan is a loan against your next paycheck.  It’s along the lines of a check cashing service where if you could just wait a few more days you would get the money you’ve already earned for free.  Of course, like any loan, there is a cost for taking on the risk of lending another person money.

Like a check cashing service, the specialty of a Payday Loan is in immediate funds.  Almost every employed person will be approved, and the cash could arrive in your bank account as soon as the same day.

Due to the nature of Payday Loans, if you are self-employed you will almost always be rejected.  The main difference between a Payday Loan and a Check Cashing Service is that with a Check Cashing Service you pay for the convenience of not having to wait for your check to clear thus the fees are much lower than a Payday Loan which is a loan based on future earnings.

Usually, you will have to repay the loan within two weeks (your next paycheck). However, some services allow you to extend the loan up to 3-4 pay periods in the future.  However, this is extremely unwise.

A Payday Loan is already very expensive, extending the term even by a week can dramatically increase the cost.  If you think you won’t be able to pay back the loan within 1-2 pay periods, I strongly suggest that you don’t take the loan.  On top of the fact that I don’t condone payday loans, to begin with.

What are the costs?  Very high.  On the order of 20%+ interest.  So, if you were to borrow $300 for one pay period, it is likely that you will have to pay at least $360 back in two weeks or $432 in a month.

The interest rates on these loans are in the same ball park as expensive credit cards only the payments and interest arrive twice as quickly.  As such I think it is fair to say that Payday Loans are at least twice as dangerous as credit card debt.

When is a Payday Loan Useful?

All kinds of debt can be dangerous, even mortgages (housing bubble anyone?).  However, most all loans can serve a purpose if used wisely.  How do you know if you’re using a loan wisely?  Straightforward, just answer two questions.

The first question is, are you 100% certain that you can pay the loan back at the end of its term?  The second question is, are you using the loan for its intended purpose?  That, of course, begs the question, what is a Payday Loan’s intended purpose?

A Payday Loan is, in essence, an instant cash infusion for an immediately necessary expense.  Unlike a credit card where you may use it to buy everyday items and accrue points, a Payday Loan needs to go towards a dire circumstance.

What is considered a dire circumstance?  A dire circumstance would be a few hundred dollars short on a mortgage payment, a final notice electricity bill to keep the lights on or an urgent medical bill.  You should not be buying anything new with a Payday Loan.

If you think you qualify under these rules of reason, then you can get a Payday Loan.  However, you need to promise me it’s a one time deal and then you will start to save money!

I’d instead you go with a reputable company if you are going to get a Payday Loan so if you’re from the US, you can go through National Debt Relief and if you’re from the UK, you can go through Cash Window.  Both companies have excellent FAQs and reliable customer support for if you have any additional questions not covered on their websites.

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Some Payday Loan Alternatives

Hopefully, you’re realizing that you aren’t in a truly dire situation.  I’m sure that I’m not the first to tell you that there are other options as the internet is littered with ways to accumulate debt.

Lowest on the interest scale is a home equity loan.  With this loan, you borrow against any equity you have in your house putting your home up as collateral.  Of course, if you fail to pay, you lose your house.  Also, not all of us own homes so this isn’t always the most viable option.

If you do need a loan that is either larger than a typical Payday Loan or not for truly dire circumstances (and you need the money today), I would recommend is a crowdfunding site for personal loans.  I’m going to write about it in more depth in the future, but if you’re looking for a loan between $2,000 and $35,000, it’s a place where you will get a great deal.

I hope you found this article helpful.  The point is to make sure you use the right tool for the right problem and don’t overpay due to lack of information.  Do you have any personal experience with Payday Loans?  If so, please share them in the comments!

Andrew Fiebert - Chief Nerd Andrew Fiebert is a thirty-something soon-to-be father of twins, a self-professed data nerd, and has worked as a Data Engineer for Barclays Capital and iHeartRadio. He's spent the past six years growing LMM into a multi-six-figure business with over 500 hours of free personal finance education that reaches over 1 million people every month. Andrew has a B.S. in Computer Science and has been featured in Quartz, Forbes, Business Insider, and The Telegraph.
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