Before deciding to take out a payday loan, there are certain factors to consider to determine whether this is the right course of action for your personal circumstances.
Key Points
- Payday loans are a good option for people who need to cover emergency payments until their next paycheck
- When deciding if you can repay a payday loan, always factor in the interest rate in addition to the principal amount
- If you are having long-term financial problems, payday loans should not be used as a solution
What are payday loans for?
Payday loans are designed to be a short-term solution for those in need of quick funds. They are supposed to be used to cover emergency payments that may arise between paychecks. Common uses for payday loans are things such as unexpected home or car repairs, tuition fees or unanticipated medical bills.
Typically, these types of loans have short loan terms (2-4 weeks) and are for small amounts only (usually between $300 to $500). This is because they are meant to provide an emergency solution rather than as a way of helping long-term financial problems. Using payday loans for non-emergency costs, such as monthly utility bills or shopping, can lead borrowers into a dangerous cycle of debt.
Do you need a payday loan?
Understanding the purpose of these loans is an important first step before entering into an agreement with a payday lender. They should not be used as an ongoing form of credit but, instead, for short-term, emergency purposes only. Thus, before applying for a payday loan you should know exactly what you want to use it for.
If you have an unexpected payment that arises and you cannot afford to repay it immediately, a payday loan may be right for you. The loan will provide you with the funds to cover the unexpected cost and you can repay the loan on your next payday. If, however, you are struggling with ongoing debt problems, payday loans are probably not the right option for you. These loans incur impossibly high interest rates making it easy to worsen an existing debt problem.
How much do you need to borrow?
Similarly to knowing what you need the loan for, you should also know how much you want to borrow. Payday loans are one of the most expensive ways to borrow money online and incur extreme high fees and interest rates. Only take out the minimum amount that you need as the more you take out, the more you will have to pay back in interest and fees.
Can I afford to repay a payday loan?
When taking out a payday loan, you will need to make sure that you are not only able to repay the principal amount, but that you have factored in the affordability of the fees and interest rates.
The majority of payday loan borrowers are unable to repay their loan on the repayment date meaning that they are forced to rollover and accumulate further debts. Around 20% of borrowers are unable to pay back their payday loans and 75% of products are taken out by someone who has previously taken out a payday loan and a quarter are rolled over 9 times or more. So you don’t want to be another statistic, you want to be able to repay your loan without falling into a spiral of debt.
Will I be approved for a payday loan?
Payday loans are one of the easiest loans to be approved for as, unlike traditional lenders, they do not discriminate against poor credit history. However, those with a poor credit history will usually be faced with higher interest rates and could also be limited in how much they are able to take out.
In general, to be approved for a payday loan you will need to prove that you are over 18 years old, have a valid checking account and demonstrate proof of income. Certain lenders may have additional eligibility requirements.
It is also worth noting that payday loans are not legal in all states. Payday loans are illegal in 12 states and operate with restrictions in other states, so it is always worth checking this beforehand to avoid disappointment. If you are looking to apply for payday loan in California, Texas or Nevada, you will be fine. But states such as New York and Illinois have banned this product.
Before deciding to take out a payday loan, you should check that you can afford to pay it back, plus interest and fees, on the due date.
Should I take out a payday loan?
If you have a good credit score, there are many alternatives to payday loans on the market that have more favorable conditions such as lower interest rates, longer repayment times and higher loan amounts. Therefore, payday loans are probably not the most suitable option for this borrower profile.
For those with poor credit, it is true that payday loans may be a good option as it is likely that you will be approved and gain quick access to money. However, the high fees and interest rates are important risk factors. If your credit history is already poor, being unable to repay a payday loan will have a hugely negative impact on your long-term financial profile.
In general, you should always seek alternatives before entering a payday loan agreement. The majority of payday loan users are unable to repay their loans at the given time meaning that they end up accumulating debt and worsening their financial situation.
