Are Payday Loans A Good Idea?
Posted: April 19th, 2010 | Author: Joe | Filed under: Debt | Tags: Debt, Payday loans | No Comments »Payday loans are short-term, high-interest loans. They are called payday loans because they are effectively an advance on the borrower’s next paycheck. When I say high interest, I mean really high interest. They make store cards with 30% interest look cheap! It’s not uncommon to pay over 300% in interest for a payday loan.
Obviously, I don’t think they are a good idea. In fact, I think they’re the thermonuclear device of the personal finance world.
Payday lenders say they are simply providing a service – a service that millions of people use, especially in time of economic hardship like recession. But let’s be honest. There’s providing a service that people need, and then there’s taking advantage of people in need. I think payday loans take advantage of people who are in need.
Take for example this article which spotlights a man who became trapped in the payday loan cycle to a point where he was keeping it a secret from his wife and contemplating suicide.
I’ve been offered money to advertise payday loans from the day my blog started attracting readers, and I’ve always turned them down. It’s a matter of conscience for me. I won’t lie, it was tempting early on. I tried to rationalize it by saying that my family could really use the extra money to get us out of debt, and that people should be responsible enough to avoid such loans. Caveat Emptor – “Let the buyer beware” (only in this case it’s the borrower not the buyer). But I learned early on that all to often people simply lack the basic financial education to be able to make that choice and I decided I wasn’t going to help promote that financial underworld.
Proponents of payday loans often say that they are a last resort and should be used sparingly, but at 300% or more in interest I wonder how they’re different from a loanshark.
A payday loan may sound like a lifeline or your port in a financial storm, but it’s nothing of the sort. It’s more likely going to be your first foray into a life of dependency, of fee and interest payments bordering on usury.
What it boils down to is preparation.
Payday loans are essentially marketed as instant emergency savings, but they’re not. They’re loans that carry a heavy price. You’re far better off creating a real emergency savings account so you’ll have the money when you need it.
If you’re in a bind though and need the money now and don’t have an emergency savings account, then try negotiating a payment plan instead of taking out a payday loan. Payday loans are usually for a relatively small amount of money (not much more than $1,000), so you may be able to pay your debt (car repair bill, appliance bill, etc…) off over a series of payments each pay period and save hundreds in interest in the process. After that – START AN EMERGENCY SAVINGS FUND. 
