The Truth About Payday Loans - The Negatives, Part II
In my last article, I wrote about some of the good uses of payday loans (cash advances). You can read that article here to get caught up, but here’s a quick recap of the three most common scenarios in which a payday loans can be very helpful:
1. Short term cash flow problem that could adversely affect your credit, but that you know for sure will only be temporary.
2. Medical emergency
3. An advance for money you know you’ll be getting, but that you could really use right now.
Clearly a cash advance can be very helpful when used responsibly, but an important point to realize is that a payday loan can do more harm than good if not used properly. Here are a few points to keep in mind if you’re considering applying for an emergency payday loan:
1. Pay back the loan as soon as possible. While you might not find the initial fee for a payday loan to be too much of a burden, a continuous cycle of debt can become a downward spiral. Fees on top of fees and before you know it you’re in a far worse position than where you started. If you have a long-term debt issue, seek the advice of a professional debt manager or credit counselor to find a way out. A payday loan is not right for this situation.
2. Even if you do pay off the loan quickly each time, don’t make a habit of using payday loans to get out of difficult financial situations. I often compare payday loans to hocking your stuff at a pawn shop because the payment terms are similar. When I was in college, I had a guitar amplifier I would hock at the pawn shop every month. I’d get my G.I. Bill money at the beginning of the month and get my amp out of hock, then by mid-month I’d be broke again and I’d be right back at the pawn shop. After repeating this whole process many times I realized I had spent way more money in the course of the year to get the amp back than it was even worth. If you find yourself making a habit of using cash advances, bite the bullet at some point and go make a few extra dollars to put in an emergency savings account.
3. Consider the APR before you try to convince yourself it’s not that expensive. Typical APRs on payday loans average about 400% but can be as high as 5,000%. By comparison, the average credit card APR is around 12% if you have decent credit and you can sometimes get unsecured loans from banks and credit unions for around 7%. Don’t kid yourself about what you’re really paying!
If you’ve considered these negative aspects of payday loans and still feel it’s something from which you can benefit, then by all means use it to your advantage. We have had great feedback from our readers who have used this site, where you can get up to $1,500 wired to you in an hour. There tons of great reasons to get a cash advance, but used irresponsibly, they can get you in hot water.
Written by Jim on June 1st, 2007 with
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