Debt Management

Why You Should Always Avoid Taking Out Payday Loans

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Financial emergencies can happen when you least expect it. If you’re not prepared for them, the stress can be insurmountable. It can be a difficult task to find a way to pay for a beloved pet who is sick or injured. Or new brakes for your car — you know, the one that gets you to work each day. When disaster does inevitably strike, we have one very simple piece of advice. The best thing you can do for yourself — and your finances — is to strictly avoid payday loans. Seriously. No matter how desperate you are.

In the age of technology, access to these types of loans is as easy as typing in “quick loan” on Google. The number of same-day loans offers at your fingers tips might feel like the cure to all your stress. The concept of payday loans is pretty simple, on the surface. You borrow the amount of cash that you need, plus a fee, and you pay it back on your next payday.

If you’re able to pay back the entire amount by your next payday (and don’t mind paying the fee), a payday loan isn’t such a terrible idea. It allows you to get the cash you need immediately. Then you’re free and clear of the debt within a week.

Payday loans are a quick and easy way to get cash. There’s often no credit checks and no application process. All you need is a recent pay stub to prove your income. However, it’s also a very quick and easy way to end up in a tight financial situation. Here are four reasons to avoid ever taking out a payday loan.

Costly Fees

One of the top reasons to never get a payday loan is their astronomical interest rates and fees. They are often much higher than a personal loan or even a credit card. Most payday loan lenders charge a fee for every $100 borrowed, which can range from $15-to-$19 in Canada. For example, if you took a $500 payday loan in Ontario, you would need to pay back the $500 plus a $75 fee on their next payday. A $15 fee for every $100 may seem like a low annual interest rate. However, if you do the math, it’s much worse. You would be paying the equivalent of a 391.07% APR. Which is ten times more than an average rate on a high-interest credit card.

Despite payday loans being meant for a short-term fix, many borrowers are unable to pay off the entire loan. With a short repayment window (14 days on average), it can difficult to recover from a financial crisis that quickly. Rather than defaulting on the loan entirely, most borrowers will renew them. That costs even more in interest and starts a circle of borrowing that is hard to escape.

You’ll Get Stuck in a Repeat Cycle.

Even though payday loans are meant to be repaid within two weeks, the average borrower stays in debt for much longer. Due to the high-interest rates and fees, it’s easy to get caught in a repeat cycle of rolling over your loan for another two weeks. Although most payday loan lenders will say that you cannot legally rollover your loan, there are loopholes. They will allow you to just take out another loan in order to pay off the original loan. And tack on more fees and interest charges.

As an example, say you needed $500 right away for an emergency. If you don’t have access to an emergency fund and your credit cards are maxed out, your options seem limited. So you turn to a payday lender to get the money you need. You’re able to get the money quickly and easily, which offers you temporary relief. Everything is good — for a little while.

When payday comes, you realize you don’t have enough money to cover your regular day-to-day expenses, as well as cover the loan and the fees. This is the beginning of a debt cycle. As the cycle continues, your costs continue to grow. You can quickly reach a point where you owe more in fees than you do on your original $500 loan.

Quick cash comes with a price. In this case, it’s high fees and interest rates. Borrowing money this way can be expensive, especially if you’ve made a habit out of it. Having to continue to borrow to cover day-to-day expenses is not only costly, but can take a toll on your mental health and stress levels. Taking a payday loan can be a quick and temporary fix, but it often leads to a more severe problem down the road.

They Contribute to Unhealthy Financial Habits

Getting a payday loan can be a convenient and easy fix for a short term problem. However, the downside is that it regularly contributes to a larger and more long-term financial struggle. Until you are able to fix the underlying problem with your money habits, getting payday loans will only continue to foster unhealthy financial behavior. Which in turns, will cause even more financial troubles in the future.

You may think that taking out a quick payday loan isn’t a big deal. After all, it was an emergency, right? That’s often what the lenders are banking on, though. That you’re only concerned with what’s happening now, and not thinking long term. You might start by borrowing for an emergency. Next thing you know, you need to take out more loans for utilities, groceries, and other normal expenses. The more you have to use payday loans, the less likely you are to learn how to manage and save your money correctly.

Managing your money and knowing how to preserve it is an essential skill that everyone should have. Thinking long term is going to benefit you more than scrambling just to tide you over until the next payday. You really need to have some savings to cover emergencies. Even just a little bit. If you suddenly suffer from job loss, an illness, or a hefty unexpected bill, those emergency funds are going to be vital. Not only will they help ease your stress levels surrounding money, but they also keep you from making bad short term decisions. Like taking out payday loans.

There Are More Affordable Ways to Get Cash

When financial emergencies pop up, our brains will usually go into survival mode. You’ll instinctively have a strong desire to fix things quickly and easily. If you’re stuck in a situation where you need extra cash, try to follow the following advice. Take some time to step back and look at the situations from all angles. If you can do that, you’re more likely to avoid future hardship.

Your first step should be to speak to your creditors. If you have an good relationship with them, they might be willing to work with you. They could offer an extension on your payments, set up a payment plan, or even waive or lower possible interest that may build up. While it’s never wise to not pay your bills, taking the time to communicate with your creditors shows that you’re willing to make good. You just need some extra time. As long as you stick to your new repayment plans, you’ll be fine.

If you can’t renegotiate your debts yourself, there are still a few routes that you can take in order to avoid taking out costly payday loans.

Ask Your Boss

Asking your employer for an advance on your paycheck may seem like the last thing you want to do. It can be a bit embarrassing. However, it is a very real option. If you work for a smaller company and have a good rapport with the owner(s), they may be willing to give you an advance on your paycheque.

This is essentially the same thing as getting a payday loan but without the high fees or interest. However, you need to keep in mind that your next scheduled paycheck will be lower or missing altogether. You’ll need to strictly budget — and probably make some sacrifices — in order to stay afloat until the next normal paycheck comes around. Still, this option is way better than a payday loan.

Ask a Friend or Family Member

Borrowing money from a friend or family member is another way to get a short term loan. You’ll have to swallow your pride a bit in order to ask, but it will be the least expensive way to secure the money you need in such a short period of time.

Getting a personal loan is probably the cheapest way to get the money in a hurry. Most family and friends won’t add fees or interest, and are okay with a more lenient repayment schedule. However, if things go wrong, a personal loan can be damaging to lifelong relationships.

Make sure that you have a set agreement in place, communicate honestly, and make payments when you agreed to. These are the essential steps to make sure that you maintain your relationship. In fact, you should both read this article about lending money to family and friends beforehand. The easiest way to ruin a relationship is to take financial advantage of a friend or family member. You should be as serious about paying back a personal loan as you are about paying back a bank. It will save everyone a lot of stress.

Ask the Bank

If you have a credit card with an available balance, you can always charge the funds you need or take out a cash advance. Be warned, though, that these do still come with interest fees that are sometimes higher than your standard APR. Normally, taking a cash advance on your credit card isn’t something we would recommend. However, if your seriously considering a payday loan, a cash advance is still a better and cheaper option.

The Last Word

Getting out of a payday loan cycle takes time, planning, and dedication. If you want to put a stop to this costly cycle, you need to ask yourself why it’s happening in the first place. It usually boils down to one of two things: you’re not making enough money or you’re spending money in areas you don’t need to.

Once you have figured out the answer to that question, you can start taking steps towards eliminating your payday loan debts. Finding a credit counselor is the great way to discover why you may be in this situation in the first place. They will also offer ways to get out of it.

A credit counselor will be able to help you identify where your financial shortfalls are, what needs strengthening out or re-structured, so you don’t find yourself in a situation where you need to seek out a payday loan again. Life throws us curve balls on the regular. Being financially prepared is the first step to making sure you’re not caught out in the cold. Barring that, payday loans should be the very last resort. Really, they are only a small step up from asking your local mob-affiliated loan shark to float you a couple grand to bet on the Knicks. Don’t do it!

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