Is a Payday Loan Suitable For You?

admin — Sun, 14 Jun 2009 01:42:41 +0000

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

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How to Manage Payday Loans

admin — Sun, 14 Jun 2009 00:40:00 +0000

A payday loan could be just what you need when you are faced with a short-term financial emergency that your paycheck simply won’t cover.

Imagine that a family member suddenly needs expensive medical treatment, or that the car you depend on to get to work requires urgent repairs. You don’t have enough money saved to pay the bill, and your credit card is maxed out. The bank won’t help you out either since your credit score is not looking too healthy right now.

Fortunately, as long as you have a bank account and a regular income, you can get a payday loan to tide you over until your next paycheck – provided they are permitted in your home state, of course.

It is important to remember that this is only meant to be a short-term solution to an acute cash-flow crisis, and not a way to supplement your salary on a regular basis.

Here are 5 Good Tips on How to Manage your Payday Loan if you must get one:

You need to know how to manage your payday loan responsibly, so that the fees don’t start to stack up and sink you even further into debt. Remember that you have to pay a new fee each time you roll over your loan (usually every two weeks), so the longer you borrow for, the more you have to pay. If you convert the fees on a payday loan (typically $15 per $100 borrowed, for each two-week period) into an annualized percentage rate (APR) you arrive at a hypothetical (and eye-watering) 391% interest rate on a year-long loan.
Mark your calendar so you know exactly when your payday loan is due, and plan ahead to put aside the cash you need to repay it. Aim to pay off the loan as quickly as you can. If you find that you do need to extend, try to borrow a smaller amount the second time around – this will keep the interest costs down. Each state has its own regulations about the number of times you can roll over a payday loan, so make sure you know the laws in force in your home state. Certain states have banned extensions altogether, and require that you pay your loan off in full at the end of the term.
You should be careful of taking on more than one payday loan at a time – in some states this is illegal in any case. The only possible exception to this rule is if you are due to receive a large sum of money that will cover the repayments and leave you plenty for your ongoing needs. In that situation, you might be able to justify borrowing from two different lenders if the maximum permitted loan from each is too small for your requirements – but never otherwise!
Make it your firm policy not to sign up for a loan unless you are 100% sure you can pay it back on time. If you applied for your payday loan online, when the due date comes around the lender will debit your bank account for the amount you borrowed plus the fee, unless you request an extension ahead of time. If you don’t have enough money in your account and the debit doesn’t go through, the lender might also decide to sue you – and that is a situation you want to avoid at all costs. Alternatively, you might be lucky enough to have an overdraft agreement with your bank, but remember that you will still be charged a hefty fee.
Lastly, make sure you only borrow to cover a genuine financial emergency that you cannot fund out of a single paycheck. No matter how easy it is to obtain a payday loan, don’t be tempted to get one so you can go on vacation or buy the latest gadget or fashion accessory. A payday loan is not a realistic way to solve a long-term financial problem either, given how quickly the fees add up. Nevertheless, as long as you manage your payday loan wisely you will find it to be a real friend in need.

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