Whenever you take out any loan, it is important that you do so responsibly so you don’t end up buried in debt. This is especially true with payday loans because they come with high fees and interest rates. Despite these criticisms of payday loans, they can be very helpful in emergency cash flow situations, like if your car breaks down or you need a deposit for an apartment. Here are some tips for making sure that you are using payday loans responsibly.
- Always make sure that you understand the full terms of the payday loan. Even if you don’t think you will default on payment, make sure to read the terms for default (or late payments and rollover). Responsible borrowing means considering the worst possible situations and being prepared for them!
- Don’t use a payday loan to pay off other debts. Using loans to pay for debts will just get you further into debt – especially at the interest rates of a payday loan! Only use a payday loan for paying debts if it is economically smart to do so. For example, let’s say that you have fallen way behind on your electric bill and it is due to be shut off if you don’t pay by a certain date. Electric companies will usually charge a very high fee for turning the electricity back on. If these fees are higher than the payday loan fees, then it would be a good choice to use the loan to pay off your electric bill debt.
- After getting a payday loan, many borrowers go on with their lives as normal, forgetting that their next paycheck is not really theirs (or at least part of that paycheck). Make sure that you make a financial plan which calculates the cost of the payday loan into the budget. Add up all of your expenses (bills, rents, food, gas, etc.) and then compare this to your income after the debt amount has been paid. If your expenses are greater than your income, you will just get put into further debt. Find ways to cut back expenses so your income will meet your expenses.
- Short-term loans like payday loans are not meant to be used for long-term problems (like debt gone out of control or being unable to meet your daily expenses with your current income). Be realistic when taking out a payday loan or it will just add to your problems.
- Do your research before taking a payday loan. Foremost, you should make sure that you are choosing a reputable lender for the loan. Then look at all the different aspects like fees, APR, rollover plans, and repayment options. You will also want to look at your state’s specific laws about payday loans to make sure that the lender isn’t charging over the legal maximums.
- Don’t forget that a payday loan holds just as much weight as a bank loan. If you don’t pay off the payday loan as agreed upon, it will harm your credit score.