If you are caught off-guard by an unexpected expense, like a big car repair or medical bill, or maybe you need to travel at short notice, or perhaps the fridge or washing machine blows up, what would you do? Or perhaps you need to pay a rental bond, or temporarily stretch the grocery bill, or the day you get paid has been changed.
If your credit card is maxed out and you don't want to pester a friend or relative for help, probably your best option is a payday loan.
Sometimes it is called a cash advance or a check advance, or a post-dated check loan, or a deferred-deposit check loan. No matter how you describe it, a payday loan is a short-term unsecured high interest loan. They generally range between $100 to $1,000 for periods of a few days to a few months. A typical payday loan would be $300 for two to three weeks.
A typical payday loan borrower is in full-time employment, age d 25 to 45, with average income. As the name suggests, a "payday loan' is designed to bridge the gap in your cash flow until your next pay is received.
With a payday loan gives you the cash you need now, and you repay the lender on your next payday when the lender presents your check to the bank for payment, or by direct debit to your bank account. It is your obligation to ensure that your account has sufficient funds to meet the loan payment. Loan payments can usually be spread over more than one payday.
Payday loans have advantages and disadvantages.
On the positive side:
- Often a credit check is not required (individual lenders vary, however).
- The processing time is usually very fast, with funds available immediately or overnight
- There are no up-front costs, and the best lenders won't even charge an application fee.
- It's convenient - there are thousands of street-front and internet providers to choose from at any hour of the day
- A payday loan is often available to borrowers who have been refused a loan from the banks or finance companies, or other traditional sources
- A payday loan can be for an amount which is too small for other lenders (e.g. $100)
- If your short-term expenses are greater than your short-term income, a payday loan will only make your financial situation worse
- If your income is spasmodic, or unreliable, a payday loan may not be flexible enough for you, because high fees apply when you extend or delay payment
- If you already have a payday loan, chances are another loan will only make your financial situation worse. (Financial counselling would help you identify a better solution.)
- If you usually have trouble managing money, the speed and convenience of a payday loan can lead you to over-commit. (Check your budget carefully, and seek another opinion if you have any doubts.)
- Unfortunately some payday lenders will not discourage you from over-committing. (Don't deal with a lender who does not take the time to establish whether you can afford the loan in the first place).
- Some payday lenders will not discourage you from rolling over or extending your loan, which can be very damaging to your finances (Remember: A payday loan is designed for the short-term. A long term payday loan can be extremely expensive).
A payday loan used correctly can be very convenient and useful, but of course there is a cost. If you want to avoid the costs, spend more time planning your spending to avoid the gaps in your cash flow. Do a budget - a quick search on the internet reveals plenty of free budgeting resources - and make sure you include a provision for the unexpected emergency - just what payday loans are designed for!
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