Once again, there are pluses to taking out a payday loan, like being able to get a small amount of money quickly and easily. It’s applicable only if you can pay the debt by your next paycheck. And that is the key!
Here are some basic rules to live by, if you decide you need a payday loan:
1. Only Borrow What You Need
When you’re applying for a payday loan and your take-home pay is $800 every two weeks it may be tempting to borrow a couple hundred extra dollars to buy that new gadget. But you should resist! If you need $150 to keep the power on, limit your borrowing to $200 maximum.
If you need $500 to fix the car so you can get to work, don’t borrow $700 because it is available. Borrow no more than you think you can pay back within the next paycheck or two.
If you clear $800 every two weeks and you borrow $800 with a $100 fee, you will be paying back at least $1,000. If you’re barely paying the bills as it is, you probably can’t afford that.
2. Shop Around For the Best Deal
Payday lending is big business. The Community Financial Services Association of America (CFSA) alone boasts of more than 20,000 member locations, which means it is easier to find a payday lender than a Starbucks in many places.
So far, more than one in six households (19 million, all told) in the United States have taken out a payday loan at one time or another. That means there is competition. Look for the best fees, rates and the most favorable payback terms.
In some cases, a lender will allow a borrower to pay back part of a loan when they pay a fee to extend. Each new fee will be based on the new, lower balance. If you can’t pay back the amount you borrowed by your next payday, negotiating terms could go a long way to keeping you out of the dreaded “vicious cycle”, which could turn into a real nightmare.
3. Read the Contract Carefully
As with everything in life, the habit most of us have to sign things without reading them tends to get us into trouble. Read the terms, consider the real loan cost and how quickly you have to pay back the loan.
If you only borrow $100 and clear $800 every two weeks, you can get away with not reading before signing. But if you clear that much and you borrow $600, it will be useful to know the terms, and how they fit with your other debts.
4. Consider the Impact on Your Credit Report
Many people know that the lender doesn’t consider a credit report when making the lending decision. As a result, many of them believe that the loan will never impact their credit report. That would be wrong. If you default on a payday loan, the lender will put you into collections, and they will report you to the credit bureaus.
Every payday loan application requires a Social Security Number, and that’s all they need. Also, if the time comes for the lender to cash your post-dated check and it bounces, the payday lender can take you to court to collect on the check. Also, they may choose to prosecute you for check fraud.
In many states, if they win, they can collect treble damages. It means three times the amount on the check. If you can’t pay back the payday loan and the fees, the effect can be the same as defaulting on a car loan or a credit card.
As noted, many people use payday loans and they can be beneficial when used properly. However, it is necessary to be responsible with a payday loan and pay it back as promised.
While such a loan can be a lifesaver on the short term, it is important to keep such a loan as a short-term transaction and not let it drag out for too long. By allowing yourself to enter a never-ending payback cycle, you may be costing yourself more than you save, financially.