When is a Pay Day Loan a Good Idea
A pay day loan can be a somewhat costly way to borrow money. When you take a pay day loan, you write a post dated check or provide your bank account information so the amount of the loan can be debited. The check or payment is for the cost of the loan plus the fee- which usually ranges from between $15 and $20 for every $100 you borrow. This results in an annual interest rate of several hundred percent on the loan. This figure may make it seem as if a pay day loan is a bad idea, but that isn’t always the case. There are certain circumstances in which a pay day loan may make sound financial sense.
When is a Pay Day Loan a Good Idea?
A pay day loan can be a wise choice in several situations. For example, a pay day loan is a good idea if:
- You do not want an inquiry on your credit report. If you need $100 to get you through until payday, you may not want to apply for a bank loan or a new credit card, as this can result in a new inquiry on your credit report and can lower the average age of your credit history. It may be worth it to just pay the fee for a pay day loan, even if you do have good credit and could qualify for a standard loan, just to avoid the inquiry. This is especially true if it is a one-time situation that led to you needing the loan and if you do not anticipate needing to have a credit card available to you.
- It will cost you more money not to take the payday loan. If your mortgage payment is due tomorrow and you are $100 short, you may want to pay the $15 fee to take the payday loan in order to avoid a larger late payment on your mortgage. The same is true in any situation in which you will be charged a higher fee for non-payment than the fee for the payday loan.
- You need the payday loan for a vital need: If your car is broken down and you need it to get to work, you may want to pay the fee to take the pay day loan. Otherwise, you could end up losing more money as you are unable to get to your job.
- You have a plan for paying the loan back: This is the key to a pay day loan ever being a good idea. While paying a one-time fee of $15-$20 for a $100 loan is not detrimental to your finances, many people continue to roll payday loans over, taking a new payday loan each time the old one comes due. This can result in huge interest charges and in the creation of an unbreakable cycle in which you must continue to take loans to service your debt. If you are going to take a pay day loan, you need to draw up a budget and have a clear plan that you stick to for how to pay that loan off the very next time it is due.