Do Payday Loans Ever Make Financial Sense?

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Do Payday loans ever make sense financially?
A payday loan is often more as a way of treating the symptom than treating the actual condition. Most people have alternatives.
By Hal M. Bundrick, CFP(r) Senior Writer | Personal Finance investment, financial planning, and investing Hal M. Bundrick is a personal finance journalist and a NerdWallet expert in financial matters. He is certified as a financial planner, and former financial consultant and Senior Investment Specialist of Wall Street firms. Hal has advised families, business owners, nonprofits and trusts, and also established group retirement plans for employees across the South as well as the Midwest. Hal currently focuses on making financial concepts understandable and clear.





Jul 17, 2014







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Is there ever a time to get a payday loan? Paycheck-to-paycheck living can bring you down. Spending every penny of your earnings leaves you with no space for error. While such behavior may be seen as the hallmark that is associated with the weak, research studies have revealed that a few "hand-to-mouth" households are relatively wealthy. But most of their assets aren't readily or easily converted into cash, such as a home or retirement savings account. Some people may be faced with an urgent need for funds and there is no way to access the money quickly.
Short-term, high-interest debt that's usually supported by a borrower's postdated check -- can be an appealing alternative. Although these loans are especially harmful to those with little financial resources, there may be times when resorting to payday lenders may be a good idea. However, it is usually as if treating the symptom than treating the underlying issue.
Who takes out payday loans?
While living hand-to-mouth is a financial issue that affects Americans across the spectrum of wealth however, the U.S. Consumer Financial Protection Bureau (CFPB) in Washington states that the median income of a payday loan borrower is less than $23,000. by the Center for Responsible Lending (CRL) found that the most common borrower is white, female and from 25 to 44 years old.
But five socio-economic groups were among those with the "highest chance" of taking out an payday loan: individuals without a college degree, African Americans, people who earn less than $40,000 per year and those separated or divorced according to CRL, based in Durham, N.C.
It's easy to find, but is it worth it?
When a cash need arises, payday loans -- like those -- are easy to obtain. In most cases, a person who needs to borrow money only needs to show proper identification along with proof of income as well as an account with a personal check account to qualify. The lender usually requires an electronic check or post-dated checks. access to the borrower's bank account to ensure the repayment. Credit scores aren't analyzed and an applicant's capacity to repay the loan in light of other debts and expenses isn't taken into consideration.
In exchange for fast access to cash that is needed, the fees are extreme and range from $10 to $20 per $100 borrowed for two weeks. The annual percentage rates (APR) is usually close to 400% and sometimes far greater. That has led to outright bans of payday lending or limits on payday loans in 22 states such as curbs on how many loans consumers can get in a single year.
Typical borrowers often don't have the means to repay the loan or pay for other expenses of daily life. A series of short-term, high-cost loans typically result in such cases, entrapping many of them at the price of hundreds of dollars of total costs according to the CFPB declares. People who took advantage of payday lenders typically did so often over the course of a 12 month period, the bureau said in an analysis released in the year. About half of those who were able to take out at least 10 shorter-term loans in a year.
Can payday loans be a low-cost option?
If you're faced with a cash situation, what's a person to do? It's surprising, Moebs Services, an economic research firm based out of Lake Bluff, Ill., says payday loans can be a cost-effective option, when compared to alternatives such as the possibility of overdrawing your checking account.
Banks are raking in increasing overdraft fees, reflecting the pressures that families living on their own face to make ends meet. The revenue stream was track to rise 1.6 percent to close to $32 billion last year Moebs has estimated.
Utilizing a 100-dollar example and comparing payday lender fees to the average bank , Moebs breaks down the figures:
Payday loan lenders and $18
Credit unions, $28
Banks and thrift stores, $30
Wall Street banks, $35

"If cost is a factor for the money need the payday lender will offer the lowest price they can offer,'' Moebs concludes. The consumer agency claims that four out of five borrowers -- nearly 10 million Americans are able to can roll over the loans more than once and typically often, several times throughout the year.
Solutions to payday loans
In the event of a sudden cash need and need to pay for it immediately, a payday loan may be a suitable solution in the short term. However, the Pew Charitable Trusts in Philadelphia showed that more than two-thirds (69 percent) of payday loans are taken out to cover recurring costs that are commonplace in everyday life -just 16% taken out for emergencies that were unexpected. This reveals the core issueof the hand-to-mouth family, living beyond its budget, is dragging itself deeper into debt when it makes use of the services of a payday lender.
Asked what they'd do if they didn't have access to payday loans, 81% of respondents said they would cut down on expenses, according to an survey from 2012 Pew survey. For poor and affluent households alike who live paycheck to paycheck -- cutting down on spending is one of the ways to end the cycle of accumulating debt.
Use the test below to find out the other options to payday loans.



The author's bio: Hal Bundrick is a personal finance writer and an expert on NerdWallet in financial matters. He is a certified financial planner and former financial advisor.







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