Three Questions To Help You Decide If A Payday Loan Makes Financial Sense For You
Before taking out a payday loan, you should analyze the situation to determine if the loan makes sense financially. Wondering what to consider? Here are three questions to ask yourself as you decide whether or not to take out a payday loan:
1. What is the cost of the loan?
The cost of a loan refers to the money you pay in exchange for the chance to borrow funds. The cost may include application fees, origination fees, interest rates, and any other fees associated with the loan. With a payday loan, you are typically going to face one fee in exchange for the loan.
Some analysts convert the fee into an interest rate, and that works well if you want to compare a payday loan to a mortgage or a car loan, but you have to keep in mind that these are completely different products. Mortgages, car loans, and similar financial vehicles are designed to be relatively low cost, while payday loans are designed to be a convenient solution for an emergency.
As a result, you should look at the fee on its own without converting it to an interest rate. Compare that fee to the fees quoted by other payday lenders, and when you finally find the best offer, take some time to determine if that amount makes sense for you.
2. How much money will you save if you take out the payday loan?
Once you have figured out the cost of the loan, you should assess how much money you are likely to save because of the loan. For example, in some cases, you actually save money when you use a payday loan to cover a delinquent utility bill. To illustrate, imagine the electricity company is going to cut your power if you don't pay the bill immediately.
If the power is shut off, you will have to pay a reconnection fee and a security deposit to get it back on. If the fee is $50 and the deposit is $200, that is a total of $250. If you are looking at a payday loan with a $100 fee, that makes financial sense in this situation, and you haven't even calculated in additional costs such as the cost of losing all the food in your refrigerator.
Because the concept of "emergency" can be subjective, here's another illustration to show how payday loans can help you save cash. In this case, imagine that a pair of boots you have been wanting to buy for years have just gone on sale. If their markdown exceeds the fee on the payday loan, taking out the loan can be considered financially sound.
3. How long do you have to repay the loan?
You also have to consider whether or not you can repay the loan. In most cases, payday lenders set up an automatic draft from your checking account, and on your next payday, the amount of the loan and any fees are withdrawn from your account.
Before taking out the loan, think about what you need to spend your next paycheck on. Can you afford to have a slightly smaller paycheck so that you have access to emergency cash right now? If you cannot afford to repay the whole thing at once, you may incur fees from your bank, or you may default on the loan. To avoid that, look for a payday lender who is willing to split up the repayment over two or three pay periods. Even if that lender charges slightly higher fees, the overall package may make more sense financially.
To review, when deciding if you should take out a payday loan, you need to consider three things: the cost of the loan, the financial gain or savings associated with the loan, and your ability to repay the loan. If those issues align, the answer is simple -- take out that loan. For more information on how payday loans work, contact a lender like Payday Express.