Feeling a little financially tight until your next paycheck? Hearing whispers of payday loans but thinking twice about making that commitment? Is there a way out? Yes, there is a payday loans alternative!
If you’re wondering what kind of money magic they offer, hold onto your hats and your wallets! We are here to demystify these short-term financial products and explain all the ins and outs of how they work and when they may, just maybe, make sense for your financial situation.
At the most basic level, payday loans are small, short-term loans used to shore up your finances until your next payday. Picture them as a small financial cushion, ready to catch you when you feel you are about to fall into the “insufficient funds” void. But, like all things financial, you need to understand how this product works before you hit the silk!
How Does This Whole Payday Loan Thing Work?
The process usually boils down to this. The borrower applies for a small loan from a lender. The lender determines how much you can borrow based on a percentage of your expected paycheck. The lender goes through an approval process (including verifying your work history and wages) to determine whether or not you are eligible to receive the funds.
If approved, the borrower receives the loan amount. The borrower provides the lender a post-dated check or an electronic withdrawal authorization to pull funds from your account, including loan amount and fees.
This promise to repay the loan typically happens the same day the borrower receives their pay (i.e., the next closest payday). The funds are repaid in a much shorter time frame than traditional loans.
When Might a Payday Loan Actually Be a Good Idea?
Now, we get into the controversial stuff. Payday loans have a somewhat bad reputation and for good reason. The APR (Annual Percentage Rate) tends to be much higher than other types of borrowing. Make no mistake, payday loans should never be considered a long-term strategy, or a villain-free alternative to budgeting properly.
But — and there is a but — there are perhaps two or three situations in which you definitely could consider a payday loan:
- Shock bills: for example, Your car conks out, and you need it to get to work. Or your washing machine blows up. Or you get a surprise medical bill. Life throws up surprises and leaves us all in the lurch sometimes. And a modest payday loan could keep you solvent until you are, shall we say, financially liquid.
- Saving on even higher charges: example: You know you’re going to be charged a lot more by your water provider (the company lets you pay late but charges a $100 admin fee if you do) if you don’t pay up on time. In cases such as these, a payday loan might come in clutch and help you save on an even costlier bill! The trick here is to sit down and crunch some numbers and pick an option that will be good for your wallet.
- Caveat: Look at every single other option before payday loans even register as a consideration. Overdrafts (if you have a bank account), borrowing from family or friends, charitable or support payments. While some loans are better than others, they are still loans you have to pay back, with often some added fees thrown into the mix!
The Final Word On Payday Loans: Your Need And Your Responsibility
Payday loans are a genuine financial product with strengths and weaknesses. You must fully understand how they function and realistically determine how they can work for you before using one. Remember, the power is in your hands!
