You may have heard from a lot of different financial experts that payday loans are dangerous and should totally be avoided. This is true if you’re going to use them irresponsibly for things that you don’t need or if you’re going to use them on a regular basis to make ends meet. However, if you use a payday loan responsibly when you’re really desperate for the extra cash because of a financial emergency, it might actually be able to save you money.
When you go and get a payday loan, you’ll probably pay between 15% and 30% of that loan in interest or fees once you pay it back. This means that for a $100 loan, you’ll pay between $15 and $30 in fees when you repay the loan. This is really ridiculously steep in terms of APR, and it doesn’t even begin to compare to a credit card. Normally, the rate that you pay for a loan like this is 300% or more, as compared with the 20% -25% you’d pay on a high interest credit card.
Before you stop and think that payday loans are always a bad idea, though, think about what they could save you in overdraft fees. Let’s say that because of a medical emergency that you had to pay for early in the month, your bank account is almost drained. However, you absolutely have to write a check for your utilities within the next three days. You know that right now that check would overdraft your account, so what do you do?
Well, if you have overdraft protection, you could go ahead and write the check, counting on your bank to pick up your slack until your paycheck comes in. However, even if your account only overdrafts by $5, the fee that you’re charged by the bank for using its money is likely to be anywhere from $25 to $35! Plus, if you still have a week to go until payday, the bank will probably charge you an exorbitant daily interest rate on the money that they are essentially loading you.
If you don’t have overdraft protection and simply skip the bill payment for now, you could end up with anywhere from $30 to $50 in late fees, or you could end up with no electricity for a few days. And if you’re simply not paying attention to your account and end up bouncing a check, the fee would probably be somewhere in the range of $20, plus late fees.
As you can see, the best financial decision here is clearly to use a payday loan. Even though the interest would be crazy high if you put it in terms of APR, you know exactly what to expect. What you can expect is probably lower than what your bank is going to charge you in overdraft fees or the electrical company is going to charge you in bounced check and late fees. When used wisely in a situation like this, a payday advance can definitely be a good thing.