What are the pros and cons of payday loans?

Let’s start from the basics on this one. Payday loans are small (typically less than $1,000), high-fee (often 10-30 percent), short-term (typically one to two weeks in length), loans (money given to you by someone else with a promise to pay it back), which can result in major drag on your financial situation if you have to use them at all. To be honest, the math on them is an absolute destroyer of budgets of all kinds, simply because once you take out a payday loan, the additional fees charged by the lender often make it so that you have to take out additional payday loans, paying more fees and interest, in order to pay off the first one. It’s an incredibly destructive cycle, but I’m going to attempt to give a non-biased view of payday loans so you can see what the pros and cons really are.

Here are the pros of payday loans:

      • You can get the money you need to meet short-term expenses.
      • The process is quick and relatively easy.
      • The loan is typically automatically paid off with a post-dated check tied to your next pay period, so you don’t have to go through any effort to repay it.
      • There are almost no underwriting requirements aside from having a paycheck that can repay the loan, so you are likely to be approved.

So payday loans are easily-approved, readily-accessible loans if you need money in a pinch. Wonderful. Here’s all the bad stuff that can happen with them:

      • Fees that often are north of 400 percent when compounded on an annual basis.
      • That amount is anywhere from 13 to 26 times the interest rates typically found on credit cards.
      • If you need one payday loan to make ends meet, what happens to your situation when that loan is paid back at your next paycheck?
      • In fact, 70 percent of payday loan users end up using them for recurring expenses, according to Pew Research.
      • The average borrower thus pays $520 in fees to borrow $375.

I get it. If you need to make rent or make a car payment so your car doesn’t get repossessed, payday loans might represent the only way that you can get access to the money you need. And if you have a job that depends on you having that car or you have a family that needs a roof over its head, that money is something that is needed. It’s not a want. It’s a need. And you aren’t turning to payday loans if you have things like a home equity line of credit that you can tap, a credit card with a credit limit that can cover your expenses, or an emergency fund big enough to get you through the month. Payday loans are where you turn when those options aren’t available to you..

But the expenses associated with payday loans mean that they need to be used as effectively a last resort, after every other option has been considered and worked through. What types of things can you do instead of resorting to payday loans? Here are a few:

      • Attempt to refinance current debts to improve your cash flow.
      • Reach out to lenders to see if a renegotiation is possible in terms of monthly payments for outstanding debts.
      • Apply for a new credit card or credit limit increase if your credit score is strong enough.
      • Speak to friends and family about being able to borrow money from them.
      • Borrowing from a 401(k) plan if loans are available from the plan.
      • Selling unnecessary items.

Look, the alternatives to payday loans aren’t glamorous, and they aren’t even necessarily good financial choices in the long run. But they’re better than payday loans. That’s how expensive and destructive payday loans can be to your family’s finances. If you’ve exhausted all the possible options and there’s nowhere else to turn, then you do what you have to do. But otherwise, all of the statistics show that payday loans are prohibitively expensive, and often trap people in a cycle where those expenses continue to build and eat away at your cash flow on a regular basis. The upside of payday loans – the easy access, the quick payout – those are attractive if you’re in a tight spot. But the cost is so high that they need to be looked at as the final option, rather than something you choose to turn to voluntarily.