When do payday loans make sense?
Payday loans are just another financial tool. You use tools when they help you achieve a goal faster, easier, and/or less expensive than doing the job with or without tools. The fact that a payday loan industry exists and is growing every day means that there must be some way for the payday loan tool to expedite the achievement of financial goals. For a payday loan there is only one goal and that is to solve a short term cash flow shortage.
The problem:
The problem that causes the demand for payday loans is that the bills are often paid at a different time than on paydays. The problem may be that your bills are more than expected or there is an unexpected bill, such as a car repair. The problem may be that your last payday was less than expected due to sick days or bad weather that prevented you from going to work. The result is that for a short period (less than 2 weeks or a month) you will spend more than you earn in income.
The standard solution:
If you have some contingency savings, you can borrow them to get by. You make room on your next payday to replace your contingency savings.
If you don’t have contingency savings but do have a credit card with a space limit, you can borrow the money in a cash advance from your credit card or line of credit and allocate money from your next payday to pay for it.
If it’s about paying off some overdue bills, that may be an option. There may be some late fees or late fees, but be sure to set aside money from your next payday to pay for bills and extra fees. If you have certain invoices set up to be paid by preauthorized debit, you have removed this option from your financial toolbox. If it’s for rent, you risk upsetting your landlord by paying your rent late.
All of these solutions are manageable if you have leeway in your budget. The important thing to remember is to cut a few areas of spending in your next payday period so that you can pay back the money you’ve borrowed from yourself. The short-term cash flow problem can happen frequently to busy people, so you need to stay in financial shape to deal with fluctuations in expenses or income.
The problem plus the complications:
When I was on much tighter budgets, I swear my old cars knew when I had money in the bank or a bit of a budget surplus. They would break down just because they could and I would have to use my extra money to pay for the vehicle to be fixed. When this sort of thing happens, all it takes is one or two more financial fluctuations to leave you out of cash. We all know that “things happen in 3s”.
A very current complication is that banks are reducing credit lines and credit card limits. This is a complication that eliminates one of the standard ways to solve short-term cash flow problems. You may not have any savings and now your old resources are taken from you.
At the same time, institutions are adding additional service charges and increasing old service charges. The NSF charges are high and you are hit by your bank and the depositor’s bank and the depositor for the charges. Banks and credit card companies are charging substantial fees for going over credit limits. Some even try to charge that fee if your interest charge takes you over your limit. Payment and budgeting for payment becomes more difficult when the fees charged can add up to hundreds of dollars.
The Payday Loan Solution:
If you’re going to rack up substantial late bill fees, add up the fees and compare them to the cost of a payday loan. If the payday loan option is cheaper, then it is a good deal to use it because it will save you money. You’ll have less to pay when your next payday rolls around.
Another factor that may affect your decision in favor of payday loans is that it is fast. If you qualify, you’ll usually have a yes or no answer within seconds and the money will be in your account no later than the next morning. That allows you to take care of your bills and get on with your life. At some point this may have value and may justify a percentage of the fee.
Conclusion:
You need to be disciplined and pay yourself in the next pay period. If you’ve narrowed your options to the point that a payday loan is your best option, you need to learn this discipline right away. The personal loan contract is quite simple. Borrow the money now and pay it back plus fees on your next payday. The end.
You must then apply this discipline to your budget. You need to control your budgets to get your tools back in shape. You need to rebuild some contingencies and other savings on your balance sheet. On the liability side of your balance sheet, you need to reduce debt and credit card debt so that you can have cap space on your lines of credit to help you overcome short-term cash flow challenges.
