Bharat SainiLast Updated on May 27, 2021 by Bharat Saini
The ability to borrow money in an emergency is priceless. When your car breaks down or your A/C suddenly stops working, a loan can provide quick access to cash, allowing you to handle urgent repairs. But finding a loan that fits your financial situation can be tricky, especially if your credit score isn’t perfect.
If you have a less-than-ideal credit history, consider a direct payday loan. Unlike many traditional lenders, payday loan direct lenders don’t place a heavy emphasis on credit scores, which means they may be more likely to approve your loan request.
However, payday loans come with risks—high fees and short repayment periods, to name a few—and they aren’t your only option for borrowing money, even if you have bad credit. Before deciding if this is the best solution for your emergency, ask yourself the following three questions. They’ll help you determine if borrowing through a payday loan is the right move.
Do You Need Money for an Unexpected Expense?
It’s always wise to borrow money only for unexpected expenses, not predictable ones. Even payday lenders recommend using their services in emergencies only.
When it comes to predictable expenses—like monthly rent, quarterly tax payments, or a child’s birthday—you can plan and save up over time. These are situations where borrowing money isn’t necessary. In fact, experts advise setting up an emergency fund to cover foreseeable costs like these.
However, emergencies, by definition, come without warning. Let’s say your car is involved in a minor accident and needs immediate repairs, or your home’s air conditioner breaks down in the middle of summer. Such events are not only unexpected but also essential to address. In these cases, a payday loan direct lender might seem like a convenient option.
Is This Expense Essential?
A key factor to consider when borrowing money is distinguishing between needs and wants. But sometimes, the line between them isn’t always clear.
For example, if your cell phone stops working unexpectedly, is replacing it essential? If you need it for work or don’t have a landline, the answer could be yes. However, borrowing money to purchase the latest SmartPhone is likely not necessary—especially if a more affordable model could meet your needs.
When evaluating a potential loan, think carefully about what you’re borrowing for. Borrowing money should generally be reserved for essential expenses that can’t wait, like medical emergencies, car repairs, or urgent home maintenance.
Expert Tip: According to the Consumer Financial Protection Bureau (CFPB), payday loans are often used to cover essential expenses, but they come with significant risks, such as high fees and a cycle of debt. The CFPB advises considering payday loans only for necessary and urgent costs.
Can It Wait?
Another key factor is urgency. An expense might be both unexpected and essential, but it’s important to ask yourself if it truly needs to be paid immediately. If it can wait, you might be better off delaying it until you can save up the funds.
Let’s revisit the earlier example of a car repair. If you rely on your vehicle to commute to work, you may need to fix it immediately to continue earning income. In this case, borrowing money might be unavoidable. However, if you live close to work or can use public transportation for a few weeks, it might be possible to delay the repair until you save the necessary funds. This could save you from taking on high-interest debt.
When considering a loan, think about the potential consequences of waiting. Payday loans direct lenders typically charge high fees, and the short repayment period can make it difficult to pay off the loan in time, which could lead to additional borrowing.
Statistic: According to a report by the Pew Charitable Trusts, nearly 70% of payday loan borrowers end up taking out another loan to cover the initial one, often leading to a cycle of debt. This makes it crucial to assess the urgency of your expenses before borrowing carefully.
Are There Alternatives to Payday Loans?
If you’ve answered “yes” to all the questions above and you’re still thinking of borrowing, it’s time to consider all your options. Direct payday loans aren’t the only choice for people with bad credit, and they aren’t always the best option either.
Many financial experts suggest exploring alternatives, such as:
- Installment Loans: These allow you to pay off the debt over a longer period with fixed monthly payments, which can be more manageable than the lump-sum payment required by payday loans.
- Credit Union Loans: Credit unions often offer small personal loans at much lower interest rates than payday loans. Some even provide special programs for individuals with poor credit.
- Credit Counseling Services: Non-profit organizations can help you explore ways to manage debt without resorting to high-interest loans. They may also help you negotiate with creditors to extend payment terms or reduce interest rates.
Consider This: The National Foundation for Credit Counseling recommends working with a non-profit credit counselor if you are regularly turning to payday loans for essential expenses. They can help you develop a budget, negotiate with creditors, and identify less expensive borrowing options.
Building an Emergency Fund for the Future
While loans can provide short-term relief in emergencies, relying on them repeatedly can lead to financial stress. Experts recommend building an emergency fund to handle unexpected expenses.
Start small—set aside a portion of your income each month in a separate savings account. Over time, this can help you avoid borrowing altogether when life throws you a financial curveball.
Pro Tip: Many financial advisors suggest aiming to save at least 3-6 months of living expenses in an emergency fund, but even smaller savings can make a difference in preventing the need for payday loans.
Final Thoughts: Is It Time to Borrow?
Ultimately, the decision to borrow money is a personal one. While this article has provided questions to guide your thinking, only you can determine whether borrowing through a payday loan is the right choice for your situation.
If direct payday loans still leave you uncertain despite your need for quick cash, consider safer alternatives like installment loans or credit union loans. And most importantly, start preparing for future emergencies by building your savings so that you can handle the next financial challenge without borrowing.
