Should I Get a Payday Loan for the Holidays?

For those of us who work a full-time job, payday often can’t come soon enough. Sadly, what often comes too soon are the bills that have to be paid from our paychecks. When shopping for the holidays gets added to those bills, we feel the squeeze financially. And we can be tempted to get a payday loan to help with holiday expenses.

Also referred to as cash advance loans or short-term loans, payday loans hold the lure of quick cash whenever you need it. But, is getting a payday loan for the holidays a good idea?

How Payday Loans Works

Payday loans are loans against your next paycheck. You pay interest—usually at a high interest rate. In the end, you can pay a lot of money for quick access to a little cash. You have to repay the principal and interest and possibly added charges on your next payday or within a predefined, short term of one to three months.

Like any loan or finance agreement, payday loans have advantages and disadvantages.

Perhaps the biggest disadvantage is the cost. Take for example, Lendup.com. On their Payday loans page, they show that if you take out a $200 loan today, you’ll pay a finance change of $35.20, which is a whopping 458.86% APR!¹ You have to pay the loan back at $235.20 in just 15 days. So, to have $200 today, costs you $235.20 in just 15 days. The nice thing is that LendUp is upfront about that interest rate. Many payday lenders are not.

Disadvantages of a Payday Loan

It’s important to not get a payday loan as an alternative to a long-term loan. Payday loans have much higher interest rates than loans with longer terms. You often will be required to repay a payday loan with a single payment using your next paycheck. If you can’t and your loan persists or your lender encourages you to roll your loan over, you end up paying a lot more in interest than the quick cash you gain. Think of our sample $458.86% APR compounded every two weeks.

And the U.S. Consumer Financial Protection Bureau (CFPB) reports that 80% of payday loans aren’t repaid in two weeks. They also report that interest rates can reach 521% or more.²What’s more, each time you can’t repay, the interest rate can go up even more.

Comparatively, interest rates for a credit card are usually no more than 30% for bad credit, less if you have good credit. Other types of loans also have significantly lower interest rates—whether a personal loan or an online loan. Read how payday loans compare to personal loans.

Payday loans are also often limited as far as the amount you can borrow. The CFPB defines a payday loan as one that is generally for $500 or less.

Advantages of a Payday Loan

The main appeal of a payday loan is the chance to address immediate financial problems. Designed to be quick cash solutions, payday loans let you access cash without taking on long-term debt or having to call on friends or family for help. But, that assumes you can repay them in two weeks and are willing to pay a pretty hefty price. If you can’t repay, you are taking on longer-term debt and at a steep rate.

Payday loans don’t affect your credit score, which might be a benefit depending on your situation. You also won’t be asked to provide a lot of information to obtain one or have your credit checked in most cases. But is the cost worth it? You have to ask yourself and understand what you’re taking on.

Alternatives to a Payday Loan

Before you get lured into taking on a payday loan, consider all your options. Also ask yourself if you really need that money for just a few weeks. Alternatives include:

A credit card. Even if you have poor credit, you can likely find a card for your needs. And no card will charge anywhere near the interest of a payday loan.
If you already have a credit card, see if you can use it for a cash advance.
Ask a friend or relative for a loan.
Ask your employer for an advance against your next paycheck.
Look into emergency assistance programs from local churches or community groups.
Consider a personal loan from a non-payday lender. These loans often have APRs more similar to credit cards. Even those with higher APRs rarely approach the 500% APR mark.
Ask your creditor for a brief reprieve until you next paycheck. All the creditor can do is say no. You could even offer the creditor the money you’d pay in interest on a payday loan for agreeing to let you wait. You won’t be any poorer in the end and you won’t be stuck with a loan.
Take a loan from your IRA or 401K. Even at the 10% penalty for a loan from either, you’re better off than with a higher interest rate on a payday loan.
Sell something to cover your costs or consider using a pawn shop for a loan.
Wait if you can.

How to Apply for a Payday Loan

If you do decide that you have to have a payday loan, you can get one at a payday loan outlet or online. Regardless of where you choose to get your payday loan, be prepared to prove you have a regular fixed income and a bank account. You may also need to provide:

A copy of your debit card
A copy of a government-issued ID
Proof of your current residential address, such as on a bank statement or utility bill
Proof of income
A copy of one or more bank statements

If you choose an online payday lender, you’ll have to open an account and verify your identity online to get your loan.

To Get a Payday Loan or Not

Regardless of what you decide, weigh your decision and your options carefully before you make any commitments. Draw up a budget so you know exactly how much you need and ensure you can pay it back on time. And ensure you’re willing to part with the interest money down the road. That way, you won’t end up getting money quickly that ends up costing you a lot of money in the end.

Want to know even more about payday loans? Find it in “The Truth About Payday Loans.”

¹https://www.lendup.com/payday-loans as of Dec. 12, 2018.

² https://www.incharge.org/debt-relief/how-payday-loans-work/

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