Are Payday Loans a Bad Idea?

Are payday loans a bad idea?A lot of people wonder if payday loans are a bad idea or a good idea. It really all depends on how you use them, and if you follow through with your strategy if you have one. In some instances they’re a good idea, but these are so rare that most times they turn into a bad idea. We’ll explore some of the better and worse situations regarding taking out a payday loan.

The example that payday lenders give is that their fees are a better option than some of the overdraft charges, late fees, and other expenses you’ll incur by falling behind with your bills. These examples are true in some instances, for example if you take out $100 to prevent your checking account from overdrawing, the payday loan fee might be $15 and the overdraft fee would have been more than $30. The same holds true for many credit card cash advance fees. There’s also the case of being late with your rent, and having that tarnish your rental history. If you can keep your rental history clean by paying payday loan fees, it could be a good idea later when you want to get a lease at a new apartment or home.

However, these situations are pretty specific, and even they have a small window of success, and only work if you take out a very small payday loan and pay it back completely and don’t re-loan again. What we’ve seen time and time again is that this is not how the majority of people use their payday loans.

Are Payday Loans a Bad Idea? Answer: Probably.

Most people will take out more than they really need in order to cover their immediate debt. They will treat a payday loan like an ATM machine and take out a little extra as easily as they will opt to get cash back when they use their debit card for a PIN based transaction at the grocery store. A payday loan should never be looked at as another source of cash, or something that can be used as pocket money.

By taking out more than you need, you set yourself up for not being able to pay off the loan and make it to your following payday without re-loaning. This puts you into the payday loan trap, which is a bad idea for us, but is a great idea for payday lenders. This essentially means you are taking out the same money as you did the first time, but paying a whole new fee for it. If it were your friend that lent you the money, you’d quickly unfriend them if they tried pulling something like that on you.

Let’s say you needed $400 to fix the brakes on your car. But in the moment you figured you didn’t want to have a tight week with no money so you took out $600 to give you that extra cushion. Throughout the week you spent through the extra $200 in cash on miscellaneous things as they occurred. Now it’s payday and your loan is due and after paying back the nearly $700 for your loan plus the fee, you find that things are going to be tight for the next two weeks. But you figure you can get by and you don’t reloan. A week later you get tired of living so frugally, and you go back to the payday lender for another loan.

This is where it becomes a really bad idea, because you’ve probably spent about $80 already to borrow that first $600. It’s essentially the SAME MONEY, because they force you to pay it back so quickly. Now they’re going to charge you the fee again, and you’ll be up to $!60 total paid on a $600 loan. That’s almost as much as the extra money you took out just to feel comfortable for a week.

The other bad idea is that financial hardship should make you feel uncomfortable. It’s how it teaches you to manage your finances better and prepare for a rainy day. If you are borrowing money to avoid the hurt of having no money, you won’t learn the lesson and you’ll just continue the cycle of debt and hardship and faux security.

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