Payday loans – A bad deal for tough times
Payday loans – A bad deal for tough times
We’ve all been through tough financial patches. Unfortunately, many Americans reach out to payday lenders to get them through to the next paycheck when they experience a financial emergency. It’s not a good idea and can actually damage your finances and even your credit so badly it may take you a long time to recover.
In fact, in a recent report put out by the government confirmed why these payday loans are so dangerous: 1.) 50% of people that got these loans were hit with an average of $185 in bank fees from overdrafts when the payday lender debits their bank accounts; 2.) Interest rates are outrageous, 300-500%; and 3.) 23% of borrowers had bank accounts closed because of repeated overdrafts by payday lenders.
The bottom line is that payday loans seem to cause much more trouble than they’re worth. What can you do to stay away from ever needing a payday loan? In two words…plan ahead. The tips below will get you started:
- Build a rainy day fund – Just get used to it…expect the unexpected. You WILL have unexpected, financial emergencies from time to time. The best way to handle these is to have a small cash reserve for just these times. Start small, make a goal of putting away $1,000 that’s for emergencies only and this amount should cover the majority of them. Ideally you should continue building your emergency fund to about 6 months of your household expenses in case of job loss but a small fund will keep you steering clear of the payday lenders.
- Build healthy credit – Having healthy credit and a good credit score will afford you more options in times of emergency expenses so you don’t have to visit a payday lender. Make a habit of paying your bills on time and in full, check your credit report twice a year, and make sure your revolving credit balances are low, below 20% of the total credit limit.
- Have a credit card that you can use instead of payday loan – If all else fails, keep a credit card with a low balance on hand that you could pull out for an emergency if you had to. And forgetting to buy a gift for your niece’s birthday is not an emergency and not a good reason to rack up unnecessary credit card debt. Give yourself some cushion in your monthly budget for these ‘non-emergencies.’
Take a look at your finances today and make sure you’ve got a plan for emergencies because they inevitably will happen and research shows that the majority, 62%, of Americans have no emergency fund. Don’t let that be you!
