It’s the end of the month. Your rent is coming due. Your hallway table is piling up with utility bills. Your cupboards contain a can of beans, a jar of olives and half a box of spaghetti. But the worst thing of all is you don’t have any money left in your account. Payday is 10 days away. What are you going to do?
There seems to be a solution. On the corner of a street near you is what many refer to somewhat charitably as a “non-traditional bank.” It is a small storefront, covered with neon signs. The signs advertise check-cashing, faxing, and short term loans. You enter the storefront and inquire about how to get one of these loans. Will this be the solution to your money problems? Actually, as you will see, using payday loans can make things worse. A lot worse.
First of all, you should know that the interest rates on payday loans can run into the triple digits. Credit cards have interest rates approaching 30% for subprime borrowers. Seem high? Consider this: payday loans can have rates as high as 599% for a two-week loan. This constitutes a fee of up to $23 for each $100 you borrow. Think about how much you are willing to hand over to this “bank” for a short term problem.
Secondly, with interest rates like that, it is little wonder that borrowers have trouble paying the loans back on time. After all, if you had the money, you wouldn’t need a payday loan, right? Well, late payments lead to more fees, and eventually after repeated late or missed payments, the bank will report your situation to the credit reporting agencies. That will be the start of a number of problems. Having a black mark for late or missed payments is bad enough. But it also matters that the delinquency is for a payday loan. Anyone who is assessing your credit to see if you are a good risk will see that you were using this type of credit. Users of payday loans are not known to be good credit risks, and you might be denied, or end up paying higher interest rates that you otherwise would.
Thirdly, you will have to pay it back. And all that money that you are paying in interest will mean that it will take even longer for you to dig yourself out of the hole you got into. You could end up paying ten times the amount of the original loan. That is money that you could have been putting toward other expenses- your utility bills, filling that empty fridge, paying your rent on time. Would you rather be giving it away, or spending it on things you really need?
There are other things you can do before you take on a payday loan. Swallow your pride and ask your landlord for an extension. What have you got to lose? Contact the utility company and see if you can get assistance. Perhaps there is a payment plan that will allow you to break your payment into smaller chunks. If your budget is a recurring problem, seek credit counselling. You will learn how to manage your money better so that it lasts throughout the month. Resist the temptation to get a payday loan. You won’t regret it.