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  • Writer's pictureMMH CPA

Are Payday Loans a Good Idea?

Your daredevil kid breaks an arm, the car overheats, and the house roof starts leaking. You need cash right away. Should you consider a payday loan?

Payday loan basics

Payday loans (sometimes called cash advance or deferred deposit loans) can provide short-term financing to help cover immediate needs. You can usually apply online or at a local storefront.

Here’s how it typically works: You write the lender a post-dated check for the loan amount plus a borrowing fee. The lender hands you a check and agrees to hold your post-dated check until next payday. When payday rolls around, the lender deposits the post-dated check or you extend the loan for an additional fee.

If you apply online, you’ll often be approved in minutes without filling out paperwork. In a few hours or days, loan proceeds will be deposited directly into your bank account.

Are payday loans a good deal? It depends, so before you apply, consider these disadvantages:

  • Borrowing costs are high. The interest rate on a two-week loan is typically 15-30 percent. Extend the loan for a year, and you may be paying more than 300 percent in interest.

  • Some lenders are unscrupulous. Loan shops are popping up in many neighborhoods, and crooks sometimes use them to engage in identity theft.

  • Root problems are not addressed. Habitually relying on payday loans can exacerbate poor financial habits.

  • Before an emergency strikes, take time to explore alternatives. Cut back on unnecessary expenses. Ask family and friends for help. Build an emergency fund by working a second job or perhaps selling household items online.

Bottom line? Use high-interest payday loans only as a last resort if no other lines of credit are available to you.

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