Are Payday Loans Ever a Good Idea?

Payday loans are designed to trap you in a debt cycle. When an emergency happens and you have poor credit and you don't have savings, it may seem like you have no other choice.

Are Payday Loans Ever a Good Idea?

Payday loans are designed to trap you in a debt cycle. When an emergency happens and you have poor credit and you don't have savings, it may seem like you have no other choice. But choosing a payday loan negatively affects your credit, any savings you might have had, and may even cause you to take you to court. Payday lenders make it easy for you to fulfill your loan agreements.

If you can't repay the money you borrow in your next paycheck, they'll usually transfer your loan for an affordable fee. However, except in exceptional cases, payday loans will not help create the credit you need to move to higher-quality financial products in the future. Once they receive the next paycheck, the borrower may choose to drop the check, return it to the lender and pay cash, or pay more to allow the loan to be renewed. The difficulty arises when the loan is due because by then it is time to pay the next month's bill cycle.

Payday loans are most often requested by those who have ongoing cash flow problems, unlike borrowers facing a financial emergency. Instead of torpedoing your credit score, immediately notify the lender if you know your loan check will be returned and request a payment plan. Borrowers can easily get caught in a debt cycle, by applying for additional payday loans to pay off old ones, sinking deeper and deeper into financial quicksand. Like other lenders, if you don't pay a payday lender long enough, they can take you to court and try to get a judgment against you for not paying a debt.

What you want to avoid is any situation where you can't get a loan because someone stole your identity. If you are about to be evicted and are considering taking out a payday loan to pay your rent, think about whether the loan will actually help you keep your home. If you have no other option but to apply for a payday loan, make sure you understand the terms of the loan and make budget adjustments so that you can pay it off as soon as possible. Each state has different regulations governing the maximum interest rate (if any) that cash advance loans can charge, as well as the maximum loan amount, loan terms, and allowable financial charges.

It would be better if you had a credit score of 790 and could get a signature loan for, say, 5 percent interest. Payday loan stores are open longer than normal bank hours, allowing you to easily access cash regardless of the time of day. Customers can use payday loans to cover emergencies, such as doctor visits or car problems, but most use the loans to cover utilities, rent, or other recurring monthly bills. Other states do not have specific provisions for payday loans or require lenders to meet interest rate limits on other consumer loans.

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