Payday loans: what you need to know

If your car is sitting in the driveway leaking vital fluids, you may not even have to leave home to get a payday loan as many purveyors of the service are now online.

How a payday loan works

Before you rush to do a search for “payday loan online” there are a few things you should know about how these types of loans work and what alternatives are available. A payday loan is a short term small-balance loan that is intended to tide you over till your next payday arrives. They can be conveniently obtained as payday loans do not require a credit check.

In exchange for these high risk loans, payday lenders charge a fixed fee for a fixed period, usually fourteen days and if you happen to miss the fourteen day deadline, there’s a penalty fee that is added to your charges along with another set of fees to roll over the loan through another period.

Rapid escalation

In short order, if you borrowed $500 for an emergency situation, you could end up owing as much as $700 if you miscalculated your cash flow and were forced to take a payday loan for a month. That equates to 480% or so per year and on the face of it, looks like a dreadfully large price to pay for a small amount of money. So payday loans are usually a good idea only when you have run out of options entirely.

What can go wrong?

You run the risk of miscalculating your budget and getting into a cycle of using one payday loan to pay the other. The Center for Responsible Lending, a Durham, North Carolina non-profit, reports that the vast majority of payday loan borrowers do five transactions a year, while more than half of all borrowers take twelve or more loans per year. If you get into a cycle of dependency on payday loans, it may be hard to wean yourself from the habit.

The alternatives

Realistically speaking, if you had good credit or a reasonably well-off family member, you would probably not be in the market for a payday loan. So your only reasonable alternative may be to minimize the damage. Searching for a payday loan online may be your best option for finding a reasonably low interest rate. But you must brace yourself for prompt repayment in order to avoid getting on the lender’s treadmill. Once you have lined up a reasonable rate and obtained your cash, you should start planning how to avoid becoming repeat business.

Breaking the cycle

A great place to start would be to learn how to make a simple personal budget so you can put aside small amounts of cash each payday for an emergency fund. If budgeting does not work for you, consider joining a credit union before your next crisis occurs. Credit unions now offer a nifty device called a Salary Advance Loan Program. State Employees Credit union in North Carolina has one of those. They will lend you up to $500.00 at 18% and with no fees attached and they allow borrowers to set up a loan by phone. They require that you have a direct deposit account with the credit union, into which your paycheck goes.

But what if you don’t work for the state of North Carolina? The National Credit Union Administration has a nifty web page where you can search for credit unions by type and state. This is pretty useful because some credit unions will allow you membership just because you live in a particular city or county

Otherwise

If you absolutely, positively cannot find a credit union near you that offers salary advance loan programs, try to minimize the damage by shopping around for the best possible rate, before you run into an emergency.

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