Could a payday loan cause you financial problems?
- Payday loans are a type of short-term loan.
- Payday loans usually have very high interest rates.
- Finance guru Dave Ramsey has provided some advice on payday loans.
If you’re struggling to find cash to cover an unexpected expense, payday loans may seem like a viable solution. These loans are often available immediately and are accessible even if you don’t have perfect credit. They have short payment terms, and you’re usually expected to pay them back with your next paycheck, plus fees on top of what you borrowed.
Although payday loans are easily accessible, they have serious drawbacks, including the fact that they are very expensive.
Therefore, you will want to think carefully about whether this is the best method of borrowing before you go ahead. If you’re trying to decide, a few tips from financial expert Dave Ramsey might help.
Here’s what Dave Ramsey thinks about payday loans
Ramsey is well known for his opposition to all forms of debt, so it’s probably no surprise that he advises against taking out payday loans.
In fact, on the Ramsey Solutions blog, payday loans are referred to as “a slippery slope to a cycle of debt that is not easy to escape.”
As Ramsey explains, many payday lenders charge high fees and give you little time to repay the borrowed money. Because the fees are so high, people who take out payday loans often end up having to borrow money again to pay it back.
Borrowers have generally been required to write post-dated checks or provide access to their bank accounts, so they have no choice but to make the initial payment when it is due. But they end up having to take out another payday loan right away because the original loan plus fees are so expensive that they can’t cover the loan and pay their other bills.
The result is that you end up incurring so many fees because you keep borrowing, you end up paying an extremely high interest rate – which can be as high as 900%.
Because payday loans usually end up being so expensive and leaving you trapped, Ramsey’s blog states that “payday lenders are the gangsters of the financial industry.”
Is Ramsey right?
Ramsey’s concern about certain types of borrowing, such as mortgages, is not well justified. But when it comes to payday loans, the finance guru is absolutely right.
These loans are one of the most expensive ways to borrow, and payday lenders are often predatory and target people who can least afford to pay high rates. Hence, it is best to avoid these loans at all costs.
Ideally, you’ll have an emergency fund, which Ramsey recommends, so you don’t have to borrow to cover unexpected costs. But if you don’t have the money yet and a surprise expense has arisen that you need to pay, you should consider other options.
Same-day loans from personal loan providers can be a good alternative, and even using a credit card can be better than a payday loan. Although the cards have high interest rates, they’re lower than payday loan rates – and a credit card offering a 0% introductory APR on purchases can allow you to fund your expenses over time without interest charges.
Of course, sometimes payday loans absolutely cannot be avoided. In this case, you should aim to pay them back as soon as possible and not borrow again so that you don’t find yourself in a debt trap that is difficult to get out of.
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