Published On: Tue, Jul 15th, 2014

Should A Payday Loan Be Used for An Emergency?

A payday loan is a short term loan that is marketed to help cover immediate cash needs. If you have a emergency expense, a blown tire for example, and you need a new tire, then you could use a short term loan to help cover this emergency expense until you receive your next paycheck. If you are living paycheck to paycheck or as some like to call it, hand to mouth, then you may be familiar with payday loans.

Emergencies are Everywhere

There’s really no way to prevent an emergency from happening. You can’t predict when you will drive over a nail, or when your check engine light means it’s time for a new timing belt. Those are car emergencies that do happen from time to time. This is why I wholeheartedly recommend building up an emergency savings account. Most would say to have one year’s salary saved. That will take a little while but I definitely recommend at least $1,000. If you are having a hard time saving a thousand dollars, then look to where you can cut out unnecessary spending and start snowflaking. Snowflaking is the process of putting extra cash directly into your savings account. I started to do this recently and it has made a huge difference in my ability to save. However, if you happen to have an emergency expense before you have this cash saved up, and you do not have friends or family that you can turn to for help, a short term loan might be an option for you.

Payday Loans

Short Term Loans: Know What You are Getting

There is some controversy about short term loans. They are frequently called payday loans. That is because the loan period is typically 2 weeks, or just enough to get you to the next paycheck. If you have bad credit, you still may be able to get a bad credit payday loan. The issue with payday loans is that most people are already pretty tight with their paycheck. If there wasn’t enough room to find the cash to cover the emergency, typically, there will not be enough free cash in the next paycheck to cover the payback plus the interest.

The Interest

Most of the controversy surrounding payday loans is focused on the interest. The interest for a payday loan is typically stated in dollars. So if you need a 100 dollar advance and the short term loan lender requires 5 dollars to pay back the loan then the interest rate is 5% right? Wrong. Interest rates are quoted in annualized terms. So borrowing 100 dollars for 1 month and paying back 5 dollars is equivalent to a 60% interest rate. Even borrowing money with a high interest rate credit card is cheaper, typically the highest is 24%.

The Other Side

There is a problem with lumping all payday loans together as bad. Traditional banks typically do not serve the portion of the market that needs short term loans. Yes, getting a loan from a bank would be cheaper and even getting a high interest rate credit card would be better, but those are not often options. The other side to remember is that there are people that genuinely need these services and often it is their only resort.

Read the Fine Print

Part of being a smart consumer involves reading the fine print. Don’t just believe what you hear from the salesperson. Take a second to find out what you are getting yourself into and if you are not sure, find someone you trust who can go over the details with you before making a decision.

Have you had an experience with short term cash advances?


About the Author

- LaTisha Styles is a motivational speaker, millennial money expert, and spokesperson specializing in simple finance for millennials. LaTisha is the producer and host of Young Finances TV, a weekly series featuring funny, insightful videos on the basics of personal finance. LaTisha has been quoted in Forbes and Mainstreet, featured in The Economist, and mentioned in US News as a top personal finance expert to follow on Twitter. You can follow LaTisha on Twitter for daily millennial money tips to budget, invest and achieve success!

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Did you know?

African Americans are significantly more likely to have some type of debt (94%) compared with the general population (82%). Credit card debt, student loan debt, and personal loans are all significantly higher in the African American community.

Source: Prudential’s 2013 "African American Financial Experience" study