If you’re thinking of taking out a payday loan please pause for a moment and think long and hard about what you’re getting ready to do. If that sound dramatic, it’s meant to.
Payday loans are nothing but predatory lending allowing financial institutions to make bank off of low income earners. I’ve witnessed firsthand the vicious cycle of payday loans and how freaking hard it is to break that cycle. If you’re thinking of getting a payday loan STOP.
Read this first:
Here’s What Happens When You Take Out a Payday Loan
Payday loans are short term loans in which the lender loans money until the borrower receives their next paycheck. The borrower is then to pay back the loan and associated fees or just pay the fees and let the loan rollover again. If the loan is rolled over or renewed the borrower will have to make the decision during the next pay period whether to pay back the loan or pay the finances fees and renew once again.
Payday loans are known for having super high APRs of about 400%. (Source) That means you’re going to pay a fee of $15 per $100 borrowed every two weeks, on average.
Most payday loan companies will require that you give access to your checking account or you write a check that can be deposited on the day your loan is due. However, many companies will let you do renewals in which you only pay the fees when due instead of paying all of the loan back. (This is how they make a ton of money off of you.)
If your normal paycheck is $600 every two weeks and you take out a $600 payday loan your fee for that two week loan is going to be $90.
Chances are, when you receive your next paycheck you’re going to have bills and other expenses to cover making it impossible to pay your loan back. This is where the cycle starts and why you should avoid payday loans if at all humanly possible.
Here are five other things you to instead of taking out a payday loan.
Delay the Purchase if at All Possible
The only time you should be thinking about getting a payday loan is in a true emergency. As we discussed above a payday loan costs you a lot and prevents you from building financial stability.
Determine whether or not the reason you have for getting the loan is worth it.
I’m not here to judge you – we all have different priorities and what I deem to be important might not be the same for you. But if there’s any way possible you can completely eliminate your need for a loan, or at least delay the purchase until you can find others ways of paying for it, you should.
Pick Up Extra Work
Depending on how fast you need the money there are several different things you may be able to do to earn the cash you need. It’s always better to pay for something with money you already have versus taking out a loan against your future earnings.
If you can, consider picking up extra hours at work, babysitting, house cleaning or doing some other service-based type of work to earn fast cash.
If you’re looking for extra cash in the future you can start earning on the side now with one of these 50+ legit online jobs.
Sell Something You Own
While not ideal, selling one of your belongings to get the money you need is almost always better than taking out a high interest loan.
If you have extra items that you no longer need or want, try selling them on Facebook Yardsales or Craigslist.
Start an Automatic Savings Routine
You need to have savings in place for when these emergency type of expenses come up. Whether you’re delaying your purchase until you can save cash or want to create savings for a future emergency (also known as the emergency fund) setting up an automatic savings routine works wonders.
I personally prefer to use an online savings account to do this.
You can set up a free online savings account at a place like Discover or Capital One 360 and have a set amount of money automatically withdrawn from your checking account to your online savings account.
The benefit of using an online savings account at a place that is different than you do your normal banking is that it takes 2-3 days for your money to transfer. This means you can’t impulsively spend the cash you’ve saved.
Start saving as much as you can. Even if you can only save $5 a week you’ll still build savings ($260 after one year) and you’ll be in the habit of saving money. Increase your automatic contributions whenever possible. You can put extra money you receive in there as well, like a portion of your tax refund if you get one.
To use this method to save for the purchase you’re going to make determine your deadline and work backwards. For instance if you need $500 in eight weeks divide $500 by eight and you know that you need to be saving $63 per week.
Use a Credit Card
It’s rare that I would advise someone to charge something on a credit card that they can’t pay back but if your options are taking out a payday loan or using a credit card, the credit card takes the win.
The average interest rate on a credit card ranges from 12-30%. This is loads better than the 400% you’re going to receive by taking out a payday loan.
No matter whether you choose to use a credit card or take out a payday loan you need to have a concrete plan for paying the money back.
Eliminate Spending in a Different Area
Is there something you can sacrifice now to come up with the money you need? Or maybe you can sacrifice the purchase you were going to make altogether.
If you’ve never made a budget consider sitting down and going through your expenses to see if there’s anything that you can cut, even temporarily. Making a few sacrifices now can save you a ton of financial stress in the future.
Set Yourself Up for Success Down the Line
If you’ve fell on hard times you’re not alone. That doesn’t mean that you can’t start making the changes now to set yourself up for success in the future.
Start living on a budget, working to increase your income and saving as much money as you possibly can so that you’re covered for emergencies in the future.
Related reading: What Should I Do? I’m Barely Scraping By.
Photo Credit: belchonock / 123RF Stock Photo
I believe the Pay Day loan is one of the scariest products out there. It is so easy to get caught in that cycle of debt, and it can be incredibly difficult to break out of.
I know a lot of people think that they can’t just pull in extra money, but I have built a fairly healthy set of side hustles I use to pull in an extra $3,000/year without any major time commitments. I wish other people knew that those options existed (so much so, that I started a blog about it). Instead of feeling trapped into needing a Pay Day loan, maybe they would feel empowered to get their finances back under control.
Totally agree, this type of loans will get you very deep in trouble, since the interest is absolutely insane.
Selling some of the stuff or doing some work besides your regular job can increase your income and, with time, even create another income stream.
If times were really rough, I’d rather borrow money from someone close than get into such a loan.
Yeah, I agree. Borrowing money from a loved one is *usually* a better idea than getting a payday loan but only if borrowing that money won’t ruin a relationship.
Payday loans are the devil, and I have gone through life avoiding them like the plague. If you allow yourself to get in that cycle it can turn into a bad tornado, and it won’t let you go until it’s done with you. It’s great that you wrote about this to help people make better decisions.
They definitely create a horrible cycle that is so hard to break. It’s sad that they are legal. 🙁
I just ran that Google will ban all payday loan ads. Good for them on doing that. Payday loans are definitely evil. This is why having a rainy day fund is important.
Yes. The rainy day fund is so important for eliminating the need for these type of loans!