Why Payday Loans?

In an economy characterized by tight cash, everyone from Warren Buffet to the cafeteria employees at your child’s school has a plan for how to access cash when they need it. The cafeteria worker might need money to travel to visit a sick and elderly relative – not buy a company as would Warren Buffet – so it make sense that the “cash in a hurry plan” be solid and well thought-through.

Meanwhile, a federal judge recently fined Wells Fargo Bank for charging high overdraft fees on customers. The $230 million judgment against the bank is small compared to what the entire industry generates in overdraft fees annually: $38 billion, from those who can least afford it. So if your checking account is in danger of an overdraft, it still is wise to figure out where you can access cash to keep it from falling into “non-sufficient funds” status.

Some types of loans below are not accessible to everyone. This is also an era of the ugly credit history report, how everyone is tracked for being able to make payments (or not) on time. Growing in importance are payday loans, which anyone with a job and paycheck can qualify for. But if you’re thinking about a payday loan (also called a paycheck advance), it makes sense to also consider some options. They include:

Credit cards – A lot of press and politicians are focusing on the high interest rates being charged by credit card companies on consumers who fail to keep up their payments on revolving charges. In fact, the regulations around credit cards have been very lax in recent years, and as such card users have been subject to many high fees, sometimes for no reason at all. Concurrently, fewer applicants for credit cards are able to get them today because a higher credit rating is required.

Home equity loans – If you own a home and you purchased it more than three or four years ago, there is a good chance you have a home equity line of credit on the house. These can be very useful ways of using the money your home has accumulated in value, both from your mortgage payments and from the increased value of the house (depending on when you purchased it). But home equity loans can be dangerous too. If you run up costs from borrowing on your home, you then have a larger monthly mortgage payment to contend with. When that gets too big, your home may be more expensive than you can afford, you might slip into foreclosure and lose your home and its remaining equity altogether.

Borrow from friends or family – This is the old standby, and in some families or amongst some friends it works. But when it doesn’t work, chaos can ensue. Your loan should come with a written agreement – how much is being borrowed, what the repayment schedule is and what interest charges (if any) are being charged. By working out an agreement before you receive the money, you will iron out the issues that might cause disagreement later.

Car title loans – Your car may be very important to you, not just for recreational and shopping purposes, but primarily as a means to get to work. When you go to a car title lender, you risk quite a bit in getting such a loan. Read the fine print on any loan agreement you enter into with a car title loan company to determine if you can take such a risk.

Pawnshop loans – Similar to a car title loan, you have to be willing to risk whatever it is you are offering up as collateral. Will Grandma’s china really be worth $100? What about that saxophone your parents paid $500 for – will a $50 loan really get you something that is worth taking the risk of losing it? Still, some people routinely use pawn shops to access quick cash because they understand how it works.

Payday loans (100-1000-5000 dollar loan up to 3-12 month) – This is a loan against your next paycheck. It risks no collateral and does not require a stellar credit report. You simply are borrowing against the value of your regularly scheduled pay, and if you are smart you will pay back the loan in one or two paychecks. Penalties for failure to pay back can be substantial, but they are affordable.

When asked “why payday loans?” one can easily respond that payday loans are the most manageable means of getting the cash, considering the options.