The (Evil) Payday Loan: How to Use Them Responsibly?

Payday loans aren’t evil, but they do have this reputation for a very good reason. That reason is that the “reasons” people use them are rarely justified. After all, one has to be pretty desperate for cash in order to pay the up to 400 percent interest they charge in some cases.

Counting money

Interest, or the “vigorish” as it is known as in loan shark circles, needs to be manageable for the person borrowing the money. In days gone by, when payday loan companies didn’t exist, you’d want to be darned sure you could pay the loan + vig to questionable lenders, right?

We’ve all seen enough mob movies to understand the consequences. Nowadays, payday lenders make it easy for the cash desperate to get an instant loan, without the threat of bodily harm or even death. However, you still need to know what you’re doing or risk further financial stress and potential ruin.

Consider what you’re using it for

If you’re “robbing Peter to pay Paul,” a payday loan is the last thing you need. In fact, payday loans are the last thing most people need, even at their most financially hopeless. With insanely high interest being very common for a two-week loan stint, they’re VERY expensive.

Monthly bills, sudden “investment opportunities,” or impulse buys (Ie., you can’t wait until the end of the month for the latest iPhone) are the worst thing to use a payday loan to pay something down or make a purchase with.

If you don’t know when or how big your next paycheck will be, taking out a payday loan not only risks your credit with those you owe money to currently, but also the other creditors who’re expecting money from you soon. Not to mention, the payday loan lender when/if you can’t pay.

If, on the other hand, money is tight in the middle of the month, and an essential vehicle or piece of business equipment breaks down, or the roof of your house or business caves in — and you know lots of cash is coming in soon — then it makes sense to sacrifice a few extra bucks on payday loan interest.

In other words, the consequences of not getting the money need to outweigh the high cost of interest.

Only take out a loan you can pay back on time

IF you can pay a loan back on time, without creating further financial problems, AND you have no other options available, then it’s entirely your choice. If you know you’re not going to pay the loan back, it’s not only stupid, but very unethical to take this type of loan out.

Interest rates are high for a reason, and it isn’t just because the payday loan company wants to rid you of all your money. They’ve learned over the years to set the bar high, in order to scare off eligible debtors from making promises they can’t keep.

The reality is:

  • The loan company will definitely report your default to credit bureaus, unless you make arrangements with them as soon as you know you can’t pay it back on time.
  • Your credit will be severely tarnished, as the credit bureaus don’t look favorably on people who resort to taking these types of loans out and not paying them back.
  • The payday loan company will continue charging you the inflated interest, and other penalty-type fees may apply until the debt is fully paid.

Taking loans

One lender at a time

Things can get frustrating when you don’t have enough time to secure a low interest loan from the bank, and payday lenders can’t offer you all the cash you need at the moment. When desperation hits, it might seem like a clever idea to blitz a number of companies all at once, to secure the funds you need before the credit bureaus become aware.

This practice is illegal in some places, but definitely immoral in the eyes of future lenders. Considering the already high interest rates, combined with varying application fees, you are once again “robbing Peter to pay Paul” in this kind of scenario.

Same goes with going to one payday lender to pay off another. Cases where this doesn’t result in the ruination of your credit rating are rare. Only the most financially savvy, true hustlers of the world are ever successful with such a strategy.

Proceed with caution

In short, payday loans are rarely the best option because they’re a business built based on desperation. When the wolf’s howling at the door, sound financial decisions go straight out the window.

As always, this article is not a financial advice.  The content is for informational purpose only.  Consult with your trusted financial planner for helping you with your personal financial decision.