A payday loan or instant cash advance is an unsecured loan which carries high interest. Its repayment plan is straight forward too. You pay it back from your upcoming paycheck. If you default on a payday’s loan payment the balance you owe is increased by the payday lender, charging additional interest as penalty.
Payday loans can be a great source for cash when needed to pay a bill or unexpected expense, but, there are some cases where its better you keep away from a payday loan.
I have outlined some cases where you shouldn’t take a payday loan, cases where a payday loan is considered an unwise financial decision. So if you’re looking for cash advance and considering a payday loan read this article first. By knowing when not to take a payday loan you will obviously know when applying for one can be beneficial.
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1. Big mistake to use a Payday Loan to pay off a different loan
One of the biggest and unfortunately most popular mistakes consumers make is applying for a payday loan and using the cash to pay off a different loan or to consolidate debt. By doing so you are only worsening your current debt balance.
For the same reasons you shouldn’t consolidate debt with a payday loan you should understand that any kind of loan repayment such as a mortgage loan payment shouldn’t be made with a payday loan.
2. Do not use a Payday Loan to pay anyone who works for you on regular basis.
This is more of a concept than a common case. If for any reason you don’t have money to pay an employee his salary and your thinking of using a payday loan as a solution ask your self this: If I don’t have the money to pay my employee this month then how will I pay him next month’s salary and still manage to pay back the payday’s loan repayment (which is more than the loan itself)?
3. Try not to apply for a Payday Loan just to lend to money to someone else
One of our subscribers contacted us telling us he had a friend in need for roughly
$1000 to pay for an unexpected expense and asked him (our subscriber) if he could help him out. Since they were good friends, the subscriber which was short on cash too, thought about applying for a payday loan to help his friend. We advised our subscriber not to and this is why:
A payday loan often doesn’t require a credit check, meaning, pretty much anyone with a monthly salary and a permanent address can qualify. So can his friend. If for any reason his friend can’t get a payday loan then something isn’t in place and chances are the friend won’t be able to pay the subscriber back on time. Should this happen, the subscriber would need to pay the loan back from his next salary (rule: pay off high interest debt first) putting the subscriber in debt. Most likely credit card debt because of using the money meant to pay monthly bills, to pay off an unexpected payday loan repayment.
4. Never use a payday loan to pay for unnecessary expenses.
One of the reasons consumers’ debts increase dramatically is from paying for unneeded expenses when knowing that paying off the minimum monthly payments might be unachievable. Take all that and add a payday loan to it and watch your credit score dissolve and your debt balance grow. That is not what you want! Is it? An unnecessary expense would be; a vacation, eating out, partying…I think you know what I mean.
The idea in general is to make sure that you can pay back the payday loan when you get your paycheck. I am sure that there are more cases that would quickly come to mind if you take a moment to think about them…