Bad Credit Payday Loans

People hear the term ‘bad credit payday loans’ so often, but I don’t think the average person really understands the payday loan industry. Yes, it is kind of the wild west of lending, but there are regulations and limits in place to protect the borrowers, who do at times seem to need protection from themselves. I want to discuss certain aspects of payday loans so you have a better idea of what they are, and what they are not.

So what exactly is a payday loan?

It’s a short term cash loan from direct lenders to borrowers who need to borrow against their next paycheck. The loans usually vary in size from about $100 to a maximum of $1,500.

How do payday lenders make their money?

Payday loan providers make their money off the comparatively high interest and fees they charge on these short term loans. Fees usually range from $10 per $100 borrowed to $30 per $100 borrowed. While there isn’t a nominal interest rate attached to the loans, there is an effective interest rate that stems from the fact that most lenders will let you extend the repayment period for another fee. This is actually where payday loans get their bad name.

Using a calculator on paydayloaninfo.org, I calculated that a loan that gets renewed eight times (the lower end of the average according to my research) will end up costing the borrower $180 to repay over a 16 week period. That’s an effective APR of 260%.

Are payday loans hard to qualify for?

Fortunately, and unfortunately, no. They’re very easy to qualify for. Nearly anyone with an active bank account into which the loan can be directly deposited can receive a payday loan, even with terrible credit. The only other requirement is a job. This is fortunate for those people that are really desperate for some cash, and unfortunate for those same people. Once you think about the fact that the average borrower renews or extends her loan eight to thirteen times, you realize how people can really ruin themselves with this kind of debt.

You should be extremely cautious if you have to borrow money this way. It might relieve the stress you’d feel for a few days, but it will magnify the stress you have in the weeks and months to come.

Payday Loans for Bad Credit: Do they help you or hurt you?

When I think about any bad credit loan, it only makes sense to me that it should serve some purpose beyond just adding to your monthly payments. In my mind, a loan should pass this test before you ever sign your name and spend the money:

Is the loan absolutely necessary? What are you going to use the money for? I’d say there are good reasons to borrow money and a lot more bad reasons.

Good reasons: finance a new vehicle (when your old one is no longer worth repairing), finance a home (that fits in your budget), finance your education (because this increases your earning power).

Bad reasons: finance a new car that you don’t need, finance a home you can’t afford, finance auto repairs that should have been covered by an emergency fund you keep in your savings account, finance lunch, finance home electronics, etc etc.

So when it comes to payday loans for bad credit, I’m wondering which of the good reasons for debt would be satisfied? After all, with a payday loan you’re really only getting a few hundred bucks, so what good use can it possibly be put to?

Yes, I realize that most people are using a bad credit payday loan for things like the above-mentioned emergency auto repairs, maybe emergency dental work, school supplies for the kids, etc. But I still say that’s extremely dangerous, no matter how necessary the expense seems to be in the moment. The real danger of using this type of financing in your life is that it it sets a very dangerous precedent. Once you’ve used a payday loan, your brain tells you “that wasn’t so bad” and three weeks later you find yourself in the same corner loan store borrowing another $250 or whatever.

I’ve often wished I could be a fly on the wall in one of these shops just to see how many of the customers are repeat offenders. My instinct and my concern is that it would be a majority.

So if you have no other recourse, and the lights are going to be turned off, or you’re going to lose your job, or some other legitimate emergency comes up that requires you to use a payday loan with bad credit, then I suppose you’ll have to. But promise yourself it’s a one-time occurrence. Take better care of your money, set a little aside for emergencies, and you won’t have to borrow this way anymore.