For the past two years, the economy has really taken us for a ride. The stock market has been way up and way down, bringing more volatility than most people are comfortable with. Unemployment rates are at highs most of us have never seen before. The economic crisis is hurting families at all economic levels.
Now it is more critical than ever to be careful with your finances. Last time, we looked at a strategy for eliminating debt. It requires both consistency and determination. It can be tempting to seek ways to speed up the process. Some people consider taking out a loan to pay off credit cards. However, today, I want to share one money mistake that you should really avoid.
A payday loan is one of the worst concepts ever invented. Sure, the companies are making tons and tons of money, but it is coming at the expense of those who really cannot afford it.
What is a payday loan?
A payday loan is basically an advance against an upcoming paycheck. If we find ourselves in need of cash before payday, we can walk into a payday loan office. With proof of employment, we can write them a post-dated check that is payable on our next payday. With the post-dated check as security, the loan office will give us cash on the spot.
It almost sounds good that we can get an advance on our money. But there are many problems with this.
Problems with payday loans
First, the interest rates are outstanding. Depending on the company, we may be paying 20 percent interest to borrow money for one or two weeks. If we were to annualize that interest, it would be well over 400 percent. It costs too much to borrow that money.
Second, the problem is frequently compounded. We were short this pay period. That means that automatically our paycheck will be smaller than normal on the next pay period. If we have not changed our spending patterns, it is very likely that we will be short again.
Many payday loan customers extend their repayment period at least once, and these companies expect that. So they make another 20 percent interest for a two-week period. It can become a never-ending cycle that can be hard to get out.
Third, the need for a payday loan means that we don’t have an emergency fund set aside. It is always important to have money set aside for unexpected events. This ensures that your budget is not thrown off. Emergency funds protect you from running into problems with paying your regular, consistent expenses.
Avoid the need for payday loans
It is very important to set some money aside from each paycheck, regardless of your other bills. This may be a tough concept to accept, especially when your expenses exceed what you have coming in.
However, what would you do if you had a financial emergency and had no money until payday? Credit cards are not the answer, especially once those emergencies lead to maxxing out all of your credit cards.
At all times, we need to be prepared. Don’t put yourself in a financial bind that allows companies like these payday lenders to take advantage of you. Take steps now to improve your current situation. Lots of baby steps will eventually get you to a more comfortable position.