When Should You Turn to a Payday Loan?

Imagine this scenario: you don’t get paid for another week and your car just broke down. Paying for a tow to a local garage and getting your car fixed is going to wipe out your checking account. How are you going to put food on the table until payday? How are you going to pay the electric bill? How are you going to avoid having your cell phone service interrupted?

If you’ve got great credit, you might consider taking out a personal loan. Or, if you have friends or family you know you can rely on you might ask them for help. But what if your credit is terrible and you don’t want to share your financial troubles with those close to you?

This is when a payday loan could come in handy.

What is a Payday Loan? How Does it Work?

The Consumer Financial Protection Bureau (CFPB) defines payday loans as short-term, small-dollar loans that are due in full with your next paycheck. Loan amounts are usually $500 or less. The life of the loan isn’t usually more than four weeks; in many cases, it’s only two weeks.

You don’t have to have good credit to qualify for a payday loan. In most cases, you only need to provide basic information about yourself, proof that you have a source of income (this can be from a job, disability, alimony or even child support) and proof that you have a bank account. Some lenders may ask for a list of references with current phone numbers.

At a payday loan office, you’ll probably have to write a check for the amount of the money you’re borrowing plus the amount of interest fees. The lender then holds the check until your next payday. If you don’t pay off the loan before then, the lender will deposit your check.

If you’re looking into online payday loans, you’ll give your consent to have your bank account debited on the date of your next paycheck. With lenders like Speedy Cash, you can fill out the application, submit your documents and even sign the paperwork electronically from the comfort of your own home.

What are the Risks of Payday Loans?

Suppose you borrow $400 today. Are you able to repay that in full, plus interest, in two weeks? If your answer is no, you’re like many Americans who struggle with the demands of short-term loans. According to Experian, as much as 80 percent of people who take out payday loans wind up rolling them over.

What is a rollover? Rolling your payday loan means paying the interest fee in order to extend your loan for another two to four weeks. In fact, Experian points out that many borrowers do this at least nine times before they can pay the loan off. Most lenders charge between $15 and $25 in interest per $100 borrowed. On a $400 loan, at a median of $20 interest per $100 borrowed, that works out to a whopping $720 in interest — almost double the amount of money originally borrowed.

This poses a serious risk for people who borrow more than they can repay, or who run into further financial hardship after taking on the loan.

What are the Benefits of Payday Loans?

If you understand how much you’re borrowing and you know you can pay it back without causing yourself or your family to suffer financially, payday loans can be helpful. They can bridge a gap between paydays when an emergency comes up and you can’t make ends meet. They can save you additional costs in the form of reconnection fees, insufficient funds fees and late fees. They can protect your credit from being harmed by a credit check. And they can protect your dignity when you may have otherwise had to turn to friends, family, or your employer for help.

How Many Payday Loans Can You Take Out at Once?

You used to be able to take out as many payday loans as you wanted to until they caught up with you. According to CNN Money, the CFPB has implemented new rules to keep consumers from doing more harm to themselves than good. If someone doesn’t have the ability to pay off more than one loan at a time, then they should be restricted to just one until they repay the debt. If a borrower takes out three payday loans very close to one another, the lender must bar them from borrowing again for at least 30 days.

The Takeaway

Paydays can work for you if you’re careful to only borrow what you need and know you can repay. They can also hurt you tremendously if you borrow recklessly or needlessly, trapping you in a cycle of debt that will drain you of resources. Borrow with your eyes open. If you know repaying will present a challenge, look at other means of making ends meet until you’re back on your feet. Pay a bill late, borrow from someone you trust or work out a solution with your creditors.

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