Payday loans are a contentious topic when it comes to personal finances. Some people defend them as valuable tools for those who find themselves needing money quickly due to an unexpected emergency or other sudden development. Others criticize them for being too easy to obtain and even easier to fall into debt with. This despite the fact that payday loans in Canada and the US are both highly regulated, although admittedly the exact laws vary depending on the region.
So what’s the truth? Are payday loans a good option? Or are they a scam, a trap that predatory lenders use to lure unsuspecting borrowers into debt? The truth, as with most things, is that payday loans themselves are neither always good nor always bad. Rather, it’s a matter of how they are used.
What Payday Loans Are Good For
Payday loans are small, short-term loans meant to be used to help people make ends meet when unplanned expenses threaten their financial stability. That’s why they’re called payday loans: the idea is that a borrower receives a small amount of money to help them resolve an unforeseen complication, but then immediately pays the loan back upon receipt of their next paycheck.
Examples of situations where payday loans come in handy might include instances necessitating sudden home or vehicle repairs, such as if your car breaks down and, without it, you have no way of getting to work the next day. Or maybe your electricity is in danger of being turned off because you missed your last payment. Or maybe you miscalculated your expenses and you don’t have enough this week for food or medicine. Or maybe a loved one is sick or injured and you can’t afford the travel expenses to be there by their side. If only this all had happened just one or two weeks later, during your next pay period.
Part of what makes payday loans so attractive in these kinds of situations is that they’re easy to apply for, rarely require credit checks or collateral, and provide financial assistance quickly. Problems occur, however, when borrowers overestimate their need or their ability to repay the loan in a timely fashion.
What Payday Loan Are Not Good For
Some people treat payday loans as their own personal line of credit, and this is where complications often arise. Unlike credit cards or other kinds of personal loans, payday loans are not meant to be deferred or delayed, and they aren’t meant to be used as a means of long-term financing. Payday loans are meant to be used as a short-term solution to a momentary problem. Period.
The problem with using payday loans as anything other than a short-term solution is that payday loans generally come with larger interest rates than other loans. Again, when paid back promptly, this isn’t a problem. A borrower gets the money they need when they need it, then repays the loan amount back to the borrower, plus a little extra. When not paid back promptly, though, payday loan interest multiplies rapidly. Missing even a single scheduled payment can lead to a borrower falling beneath an ever-growing mountain of debt that only becomes harder and harder to dig themselves out of.
When considering whether or not to apply for a payday alone, two things should be at the forefront of a borrower’s mind: First, how pressing is the need for money right at this very instant? Second, how likely are you to be able to repay your loan with your next paycheck? Being able to answer questions like this quickly and confidently is key to knowing if payday loans are the right choice for you.
Disclaimer: This content does not necessarily represent the views of IWB.