Payday loans are very short-term loans (usually requiring repayment within 2 weeks) that have very loose qualification terms. Generally it is enough that a person is 18 years of age or older, has a job that pays at least every two weeks, and has a bank account. Credit rating is not an issue in most cases, so even individuals with very poor credit can be approved. The interest rates for payday loans are typically much higher than other forms of loans, and can add up very quickly if the payment is not made according to schedule. While these loans would generally be considered unsecured loans, they may require the borrower to sign a check for the repayment post-dated to the due date or an authorization for the lender to automatically debit the borrower’s account for the amount due on the due date.
Because the interest rates and fees make this a costly option, this type of loan is not recommended for every circumstance. It certainly isn’t a loan you should take out in order to buy something you want that you can’t currently afford. Even the decision to use a payday loan to pay something like a utility bill that is due should be carefully weighed. While we don’t recommend habitually being late on your utility bills, it could be in your best interest to simply pay the late fee to the utility company as it will probably be cheaper, although you would then have a strike against your credit rating with the utility company (and likely with credit reporting agencies). The potential damage to your credit is the only reason you might want to consider using a payday loan for this kind of reason. However, the cost often won’t justify this kind of reasoning.
Generally speaking, it is better to attempt to access the necessary cash by some other means, if possible. Private loans are generally offered at better interest rates, as are credit cards. Perhaps you can secure a personal loan from someone you know. Consider if you have any assets that could be used to raise the money.
However, these other options require good credit (in the example of the private loan or credit card), and usually more time to arrange. The major advantages of payday loans are that they are easily available without requiring good credit, and that you can receive the money quickly — usually within 24 hours (or sometimes as little as a few hours in the case of faxless payday loans.)
These advantages make payday loans most appropriate for emergency situations where there is no other way in which to raise the necessary cash in time. Even individuals with good credit might be best served by a payday loan in such an emergency situation.
Situations in which it might make financial sense to use a payday are emergencies such as necessary car or house repairs that come up unexpectedly but must be completed in order to be able to keep driving to work, or to prevent further damage to the home.
Also, some financial situations can be even more costly in the short term than payday loans, such as checking overdraft fees or late payment fees for loans or credit cards. While careful financial planning and management should eliminate the chance for these problems, if they do occur because of an unforeseen event (such as a check deposited by you was returned unpaid and will cause checks you have written to overdraw) it can make sense to cover the amount in the meantime to avoid numerous overdraft charges that will quickly add up, given that the usual fee is about $25 to $30 and may be charged by both the bank as well as the party receiving the check. Add to that the daily fees many banks charge while your account is overdrawn and you can see that the potential for one bad check received in payment to you can quickly run into hundreds, especially if you write a number of small checks. In situations like this, a payday loan can save you a lot of money as well as protect your account from receiving numerous bad check strikes and can be the wisest choice (assuming you can “beat” the checks to the bank).
There is a lot of bad press about payday loans, not because they are not useful in some situations, but because if the borrower takes out a payday loan because they are unable to meet their regular financial obligations, the situation only becomes worse for them because when the loan comes due, they are less even less able to meet their bills than they were before, now that the extra interest costs and fees have been added. Payday loans are not intended to extend credit when the monthly income is too low to pay the bills … rather they should only be used as a tool in emergency situations by persons responsible and financially able enough to repay them in a timely manner. So above all, do NOT indebt yourself to a payday loan that you can’t realistically repay on time. Instead, be wise and handle these loans (along with other kinds of loans) responsibly.
Watch this video to learn more about payday loans: