Many loan companies offers a payday loan with a short payment term, which can pick up the threads of your bank balance if they are a little tattered before you get your pay check. You have to look at the APR on a payday loan to get a full understanding of how it works. Short term money with a short term payback period sounds like a great idea – and for some people in a limited set of circumstances that is exactly what it is. But if you stretch the payment period out into months or years you can fall victim to the larger APR connected with the financing.
Look at the amount you earn in one paycheck, look at the amount you want to borrow in a payday loan and ask yourself this question – when I pay off my loan, how much money have I got left for providing food, rent and all my other outgoings? Bear in mind that your payday loan accrues a minimum interest payment of around 30%, if and only if you manage to pay it off in full plus interest within that magic four week period. So if you borrow £1,000 before payday and get paid £1,000 on payday, you somehow have to find an extra £300 for the interest – and then you’ve got no money left to spend on food.
So the right set of circumstances in which the loan can be said to be ideal are defined by your understanding of the phrase “the before pay check personal fiasco”. In other words there are circumstances in which the loan is a good idea and others in which it isn’t.
If you routinely get into trouble before the end of the month, then a payday loan is not necessarily the best idea for you. Depends on the extent of your trouble and the pressing nature or otherwise of the payments you need to make. Cigarettes or a night out, for example, are not pressing enough concerns to borrow money at a potentially huge APR. On the other hand, an unlooked for expense or a genuinely one-off situation, in which your pay check is coming soon and you have an emergency figure to cover in the meantime, can justify the means.
Remember you still need to live once you have used your pay check to pay off the loan you have taken out, and its interest too. So ideally you are looking to borrow an amount small enough that, even with the interest (approximately £30 in every £100, if you pay off in full within the first four weeks), your remaining money from that pay check is sufficient to cover you entirely.
This might require some extra budgeting on your part – though hopefully if the emergency expense you are covering is one you could have fulfilled anyway, should you have known about it at the start of your last pay period, then you should be able to simply shuffle that expense on by one month and budget in advance to take care of the payment. Effectively you have borrowed against the upcoming pay check in such a way that you have budgeted backwards – shifting available money from your normal pay check amount from a future month into this one. In which case all you have to do is tighten the belt, not go out much for a few weeks, and you will be back on an even keel.
If you’re seeking a payday loan immediately after having been paid, you are not the right client for the service. See a free financial adviser at a Citizen’s Advice Bureau and find out what you can do to help yourself.
If you are looking for a payday loan with just a few days to go before you get paid, you’re theoretically in a position to do it and pay it off. Just be careful you follow the advice and fall into the criteria outlined above.
For further information on temporarily enhancing your finances by borrowing money against your imminent pay check, have a look at the link and see what it best for you.
About the author:
Shannen Doherty is a financial writer associated with many finance related groups and communities. She has completed her post graduation in finance and writes on various financial topics such as personal loans, open door loan, personal finances, auto loan etc. She is passionate about writing on financial topics because of her specialization on the subject.