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How To Make Wise Payday Loan Decisions
By Carolyn Heidmann
Payday loans go by many names. There's cash advance loan, check advance loan, post-dated check loan, deferred deposit check loan, and direct deposit advance. But by any other title, the principle is the same: a person needs a little bit of money to help them make ends meet until their next paycheck.
Take for example the fictional story of Aldan Devonshire. Aldan has just been hired as a sports journalist for the New York Post. He and his West Highland white terrier, Faust, squeeze into their '01 Corolla packed full with blankets, notebooks, computer peripherals—whatever would not fit into the U-haul mini-trailer. They arrive at their new apartment late Sunday evening, and after setting out a dish and bowl for Faust, Aldan goes to sleep.
On the way to his first day at the office, he suddenly remembers that his Geico payment is due by Friday, and he panics. Then Aldan remembers the electric bill at his old place is also due that week. His first check from the Post won't be cut for three weeks, and with all the costs of relocation and the deposit on the new apartment, there simply isn't enough money! He frenetically brainstorms, and just as he is turning off the interstate he sees a billboard announcing, "Fast Payday Loans." On his way home, he makes a thirty-minute stop at Serendipity's Payday loans and leaves with $450 cash. Aldan and Faust will make it through until payday.
"...By Any Other Name..."
Payday Loans: derived from the nature of the loan, which is to tie over the borrower until his/her next payday.
Check Advance Loans: derived from common procedure of the borrower writing a check, post-dated after his/her next payday, in exchange for immediate cash.
Post-Dated Check Loans: [see "Check Advance Loans" explanation.]/LI>
Deferred Deposit Check Loans: [see "Check Advance Loans" explanation.]
Direct Deposit Advances: refers to a payday loan equivalent available through major banking institutions where the borrower receives a deposit from the bank. And then, the amount of the original direct deposit and an added fee will be deducted from the next incoming direct deposit to the borrower's account.
Payday loans are "easy," that is, the borrower doesn't need to have a superior credit history. Old pay stubs proving employment are generally all that is required, and some lenders will lend to anyone who does not appear on their blacklist of known "bouncers." For this reason, payday loans are considered sub-prime, and like all sub-prime lending, they are expensive.
To borrow $100 for two weeks, for instance, one might typically pay $15 in fees. In terms of APR, that's roughly 390%—in other words, exorbitant! Fast payday loans have high associated costs as results of two things: 1.) the minimal-to-no credit standards needed to take out a loan and 2.) the small size of the loan. Because of the minimal-to-no credit standards, the lender is taking an increased risk of not being repaid, and therefore he charges more. And because the loan is so small, the costs of processing the loan appear disproportionately high.
Top Ten Reasons for Taking Out a Payday Loan
(in no particular order)
Pay bills on time/cut-off notices
Christmas/gifts
Post bail
Unforeseen auto-repairs
Job transitions
Vacation
Relocation
Groceries
School clothes for the kids
Establish credit
There are alternatives
to taking out a payday loan. One might be able to get a payday loan on a credit card, for example. Or, even better, some creditors will negotiate late payment options with their borrowers. Another good option is to consult a non-profit credit counselor, who can help you to negotiate a more feasible repayment plan.
But the best option of all is a preventive one, and though it is always being talked about, it is no small feat to practice. I'm talking about budgeting, the art of anticipation and discipline. For most of us, this "art" does not come naturally; rather, it requires hard work and a clear strategy.
Perhaps you have tried budgeting, perhaps you are even trying your hardest to plan ahead financially; but, if you do not have a clear strategy, your budgeting attempts are likely to fail. One possible strategy is to use spreadsheet software to create several virtual accounts where you can allocate money for designated purposes.
Aldan Devonshire, for instance, has a Geico account, a car payment account, a groceries account, and, yes, a Nintendo Wii account, as well as several others. By dividing up his bank balance among these several accounts, he can see exactly how much he has left for leisurely spending, and in this way, he avoids overspending.
Payday loans are a fast, easy way to obtain minimal amounts of money. They are designed for people in a financial pinch, who need just enough to make it until their next paycheck. As such, they are expensive in terms of fees and rate. While it is best to avoid such financial straits and to negotiate directly with creditors first, a payday loan can come in very handy indeed.
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