How Do Payday Loans Work? Biggest Dangers & 3 Payday Loan Alternatives

How to deal with payday loansEveryone tells you that payday loans are evil. Then, the discussion just ends there. Well that doesn’t really solve anything because chances are you still need money or you wouldn’t have even considered the loan in the first place. In this post, I want to expand the discussion on payday loans and delve into some some of the problems with them and explain why payday loans are bad. I then will go into some tips on how to avoid the need for payday loans in the first place.

The Dangers of Payday Loans

1. It’s A Vicious Cycle
Most of us have been cash-strapped at some point in our lifetimes. Emergencies come and we have to pay for expenses at they arise. Your car can break down on a freezing cold day and you need to fix something for which you didn’t originally budget. A medical situation might arise where you have to spend money on expensive medications. Anything can happen at any time.

However, there’s no excuse for always being broke right before payday. Our lifestyles should not be such that we are forced to live paycheck to paycheck. Unfortunately, payday loans are a horrible drug that causes people to get into a never-ending cycle where they’re always in constant need of a loan prior to their payday. This is a cycle that’s extremely difficult to get out of not only because the spendthrift lifestyle is so addictive, but also because of the high interest rates that accompany these loans.

2. Extremely High Interest Rates
The interest on a payday loan can crush your finances. Payday loan interest rates are absurdly high, and represent the main strategy of payday loan companies, who look to exploit the fact that you likely have no other option for a loan. Payday loan companies are so profitable because they get to charge high interest rates for loans to the most financially vulnerable people. If you are running out of options and desperately need a loan, a much better option than payday loans is peer to peer lending.

Now that we understand the two main reasons why payday loans can completely destroy your finances, we now need to figure out how to deal with the issues that force you to consider payday loans in the first place..

3 Tips on How to Avoid Payday Loans:

1. Budget in Advance
This could be the simplest solution to your financial problems. Don’t be frightened by this concept; budgeting doesn’t mean that you need to track every single penny. Budgeting involves putting aside enough money from every paycheck to ensure that you’ll have enough money to cover your fixed expenses (cell phone, rent, utilities, and any other obligations) as well as any emergency fund expenses. You need to create a budget by saving as much money from your paycheck as you need to so that all of your bills, both expected and unexpected, will be covered. Discipline is the most important factor to sticking with your budget.

2. Ask for More Hours
You could be excellent at creating a budget, but you just simply may not be earning enough money. You could create additional flexibility in your budget by increasing your income through working more hours at your current job. If you have a proven track record of producing solid results and there’s more work available, chances are that you can find more hours with your current company. You won’t have to stress over applying for another job or trying to further tighten your budget. If your hours are already maxed out, follow some of these tips on how to get a raise.

3. Find a Second Job
Sometimes you need to just suck it up and get a second job. One option is to try something unique by starting your own side business in order to earn passive income. For example, starting my own blog and writing articles for other blogs has really helped me with my finances. Having a second income can do wonders for your finances. From having more money to spend on hobbies to knowing that you can build an emergency fund, two incomes can be just what you need.

Of course the obvious caveat here is that you must sacrifice time. As a 20-something, this might not be a major issue because you have lots of energy. But if you’re a parent, you may not want to sacrifice spending time with your kids. Ultimately it comes down to your personal situation and if a second job is the right decision for you.

Final Word

Payday loans are one of the worst options to consider when you’re in need of money. These companies are vultures who will exploit your financial situation in order to make huge profits. By following some of these tips, hopefully you can avoid ever having to contact a payday loan company in the future. And if you find yourself in desperate need of a loan, try a peer to peer lending service like Lending Club before resorting to payday loans.

Have you recently had to deal with a payday loan company? Any stories, good or bad? I’d love to hear your thoughts on payday loan companies and any firsthand experiences you may have had.

(photo credit: Matt McGee)

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Categories: Credit and Debt, Loans, Spending and Saving

  • Joe

    The huge interest will kill you. Payday loans are worse than credit card debt.
    The bottom line is to spend less than you make and the three tips are great for achieving that goal.

  • HenryTalksMoney

    Payday loans are just another system that serves as an enabler for those living paycheck to paycheck. The high interest rate you’re paying further eats away at that paycheck, which makes you more dependent on another payday loan.

  • J_Yoda

    Henry, when you’re living paycheck to paycheck there are a few other options like that don’t have the highcosts. Take a look at this video on how it works:

  • Snappy

    It is quite dangerous to take the PayDay loans but with your tips we can use the loan quite well and can pay it on-time.