The best time to handle payday loans is before you ever take one out. Think about it. These cash advances on your payday charge in the neighborhood of 400% annual percentage rate interest. Now, granted, some people, because of poor decisions or just plain bad luck are in poor credit situations and don’t have any other options if they need money in a hurry. But there are some things you can do to make sure that you don’t find yourself in that situation.
First of all, the need for payday loans comes when two bad situations crash at the intersection of sudden financial need. Those situations are lack of on hand finances and lack of good credit. And, as long as you’re not currently in a crisis, these are both situations that can be fixed.
Let’s start with lack of cash on hand. You probably don’t think you have enough income to save anything. Hogwash. If you’ve ever taken out payday loans, you managed to pay them back, with 9%-14% interest tacked on. Imagine what could happen if you took just half of that and socked it away somewhere.
Assuming you took out a light loan, say $200, and paid moderate (for the payday loans industry) interest of 10%. You paid back $220. Now, if you’re like most people, you kept borrowing your $200 week after week because your budget doesn’t allow you that big of a hole. So, week after week, you hand another Andrew Jackson over to the cash store, never to be seen or heard from again.
From now on, take half of that every week when you get paid and put it into a savings account. In a year, you’ll have over $500, ready for emergencies. If you lack the discipline to keep your hands off the money, set your account up as a joint account with someone responsible and tell them not to let you take that money unless you have a real emergency. The bank will be happy to set it up so that it requires two signatures to withdraw the money.
Now, as for the lack of credit, you’re not helpless there, either. Take the other half of that $20 you’d be giving to the payday loans place anyway, and use it to pay off any debts that you have. Pretty soon, if you’re making efforts to pay off your debts, your credit score will improve and you’ll have more options when you find yourself in a tough spot. You’d be surprised how much of a difference paying back an extra $40 per month on your debts will go as far as building your credit goes.
Now, if you’re currently in the cycle of endless borrowing, make it a point to borrow a little less each time. Even if you only reduce it by $5, you’re that much closer to getting out of the hole. And don’t we all want that?