Payday loans are a credit source of last resort. Payday loans are short-term unsecured loans; typically, payday loans must be repaid within two weeks. These emergency loans can be a lifeline for those in financial trouble, but overuse of payday loans can lead low-income workers into a never-ending cycle of debt and borrowing.
How Do Payday Loans Work?
Unlike many credit products, payday loans are not granted based on your credit score. Instead, your pay stubs are used to determine whether you?ll receive credit and how much credit you?ll receive. If you meet the minimum requirements for the loan, the payday loan office will grant you a loan. The loan must be repaid within a short time frame, typically on your next payday. In addition to the balance of the loan, you must also pay a fee to clear your account; this fee is usually a flat rate per $100 borrowed.
How to Use Payday Loans Responsibly
While payday loans are too costly to use regularly, there are times when the alternative to a payday loan is even more expensive. Some acceptable times to use a payday loan include:
- Paying off a bill before it accrues a late fee. Whether a payday loan makes sense depends upon the size of the late fee; generally speaking, if the late fee is larger than the fee on the payday loan, it makes sense to use a payday loan to avoid the late fee.
- Avoiding eviction or foreclosure. Evictions and foreclosures involve massive lifestyle disruptions that often include hefty legal bills and other financial penalties. The relatively small fees of a payday loan are a much lighter burden to bear than an eviction or foreclosure.
- Avoiding service interruptions. Losing access to an essential service, such as electricity or water, is a major disruption. In addition, utilities often charge a large fee to restore your service after it has been turned off.
When Are Payday Loans Risky?
A payday loan is always risky; however, there are certain situations that magnify the risk of a payday loan. If you?re barely making it from paycheck to paycheck, then payday loans are quite risky. Each payday loan chisels a small piece of your future paychecks away. With repeated use, you may find that a large chunk of your paycheck is needed to repay your payday loans.
If you work variable hours and can?t depend on consistent paychecks, then payday loans can be very risky. Two consecutive small paychecks can lock you into a cycle of loan payments that can be difficult to break.
How To Recognize The Warning Signs of Overuse of Payday Loans
There are several ways to tell if you?ve been overusing payday loans:
- The employees at the payday loan office know you by name. Payday loans should be a tool of last resort; you should not be so familiar to the employees that they know you.
- You find yourself taking out a payday loan for a want. Payday loans should not be used to buy a gaming console or a new pair of shoes. You?re better off simply saving your money and buying the item with your own money.
- You take out a payday loan to repay a previous payday loan. If you find yourself doing this, make a plan immediately. You?re locked into an unsustainable pattern of debt; eventually, it will catch up to you. Make whatever changes you must to break out of this toxic cycle.
Payday loans are a risky financial instrument, but in the right circumstances they can be a valuable emergency resource. With responsible use, payday loans can become an invaluable tool in your financial toolkit.
About the Author
This article was written by budgeting expert Joe McGowan from SaveMyBacon Loans Joe writes about personal finance and budgeting on a number of other money saving sites, and is passionate about helping people save money.
Source: http://www.ericfinance.com/payday-loans-indicator-change/
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