Deciding Whether A Payday Loan Is Right For You

Payday loans have both advantages and disadvantages, and it pays to consider them carefully before applying. Find out what you need to know to make the best use out of them.

Payday loans are frequently touted as a quick fix for a hard financial situation, allowing you to get through the time between spending all your money and your next payday. The basic idea is that you can borrow a small amount of a few hundred dollars for a short period of a week or two, and pay off the money at your next pay day.

This type of facility can indeed be very useful if you've run out of money for daily living expenses, or if you've been hit with an unpredicted charge or expense that you just can't pay when you need to, but are cash advances always the easy way out they're described as?

To start with, we'll take a look at the undeniable advantages of these loans, before looking at the disadvantages, and possible alternatives you may be able to use if you make up your mind a payday loan isn't a good choice for you.

The lending criteria for pay day loans are really quite lax, and almost anyone who's got a job and has a suitable bank facility will probably be approved. This means that even people with poor credit scores should be able to be approved for a payday loan, even after being rejected for nearly any other sort of finance.

They are also simple to apply for, and you can oftentimes get the funds in your checking account quickly. Some lenders can even fix up an overnight deposit of the money straight into your bank account the very next day, which is patently really useful when you need money in a hurry.

Last, once you've been authorized for your initial loan, it's usually a very easy matter to 'roll over' your loan again if you find you need to make use of the facility if funds are again short in the future.

There are, even so, two substantial downsides to payday loans which you rarely read in the advertisings and web sites promoting them. Firstly, they're really pricy compared to other sorts of finance. Because the term of the loan is so small, a cost of 20% of the amount you borrow - which is just about average - will work out to be an eye-wateringly high APR.

The second drawback is closely related: because they're so expensive, you can easily be left lacking money the following month once you've paid off the loan and paid the interest. In this scenario, it's simply too easy to extend your loan again to cover the deficit, resulting in more fees, and a neverending cycle of borrowing.

Therefore, if you decide that a payday loan isn't the right decision for you, what options do you have? The first one is making use of a credit card, if you have one. While credit cards are commonly also fairly costly sorts of borrowing, they do allow you to extend the debt over a a period of months rather than needing to be paid back immediately along with a fee.

Many banks now offer an overdraft option, which can also be used to tide you over a short term lack of money. The interest rate on an authorised overdraft is probably going to be more favourable than that of a credit card, but your bank might not approve your application. Be careful about going ahead and overdrawing without your bank's authorisation, as the charges they will impose in this case will be high.

If neither of these options is accessible to you, and you have no other way of getting hold of money such as borrowing off family, then a payday loan may be the better choice. Just make sure that you use it properly, and heed the warning sign it's giving you about the longer term condition of your finances.

About the author: Martin writes on a large range of financial subjects, from payday loans to dealing with debts.