A payday loan is not difficult to get if you are 18 or over, a U.S. citizen and have a bank account and a job or other source of income.

It is a legal, tightly-regulated way to raise a bit of cash to help you manage a short-term financial crisis. But how do you know if it is really suitable for you?Of course you must be sure that you will be able to pay your loan back quickly to avoid racking up multiple fees. You have to be willing to manage your loan responsibly, and sufficiently disciplined to know the difference between a true emergency that justifies taking on a payday loan and a situation where it would simply be nice to have some extra money to spend.

For some people, a payday loan is actually the only financial lifeline they have access to. The traditional customer is a low-paid worker who lives from one paycheck to the next and sometimes simply cannot make ends meet. As everything gets more expensive and jobs are lost, a lot of middle class people are now facing economic problems and are also turning to payday loans.

Advantages of Payday Loans

In this economic crisis, millions have seen their credit scores take a tumble because they have missed payments on their credit cards, mortgages or other loans, or have had to declare bankruptcy or lose their homes. One advantage with payday loans is that although some loan issuers check credit ratings of applicants who ask for over $500, many do not. So if you are turned down by one lender because of your credit history, you should have no trouble finding another one that will grant you a loan.

Even if you do have a credit card or an overdraft facility on your bank account, there are certain situations where it can work out cheaper to get a payday loan for a couple of weeks. For example, when you are looking at being unable to make your monthly credit card payment on time, you should consider a payday loan. With a typical fee of $15 per $100, a $200 payday loan will cost you $30 per two week term. If you are late paying your credit card bill, you will be charged a flat penalty of $30-40 plus interest on the outstanding balance. On top of that – and this is very important – your credit score will be affected.

For that reason alone, you should consider a payday loan even if you have to borrow so much that the fees add up to more than what you would pay the credit card company, given that a payday loan doesn’t have any negative impact on your credit rating.

If you are facing the prospect of having to bounce checks until you next get paid, or even if you have an overdraft facility, it is very likely that a payday loan would be a far better option. Whether or not your bank covers your checks and withdrawals while you are waiting for your salary, the bank charges will soon mount up.

An Example

Let’s take an example where you write three checks and make one ATM withdrawal, making a total overdraft of $200. For each uncovered check you could be charged a $25-35 NSF (non-sufficient funds) fee, plus another $25-35 per overdrawn item if the bank honors your checks and cash withdrawals. So, your $200 overdraft would set you back $175-245 (3 x $25-35 in NSF fees, plus 4 x $25-35 for the overdrafts), even if you replenish your account the next day. Don’t forget that if you write bad checks to businesses they can charge you additional penalties or even take you to small-claims court. Plus, your credit rating will be damaged, which will increase your borrowing costs in the future.

If you are at risk of having your utilities disconnected you will probably see the advantage of getting a payday loan too, as long as you have the means to pay it back quickly. If your payment is late, there is bound to be a penalty, and if you do get cut off you will have to pay to have your service restored as well.

The table below shows a comparison between a $100 payday loan and some other instances where there is a $100 liability (all on a two-week basis), together with possible fees and their respective APRs (annualized percentage rates). It is clear from this list that a carefully managed payday loan can be a very attractive alternative to incurring other charges when you are unable to meet your usual financial obligations.

• $100 payday loan with $15 fee = 391% APR
• $100 bounced check with $60 NSF & overdraft fees = 1564% APR
• $100 credit card balance with $35 late fee = 913% APR
• $100 utility bill with $50 late and/or reconnect charge = 1304% APR

• How Can I Get a Payday Loan?
• How to Manage Payday Loans
• Personal Finance Articles
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