How To Avoid a Payday Loan

Payday loans have become a popular financial option for many people during the current financial downturn. They are advertised heavily and often help people who have few options when they find themselves in a financial bind. However, they are not necessarily the best option for financial emergencies. Here are a few tips for avoiding a payday loan.

Tip #1 – Start a Savings Account

Payday loans are often used by people during financial emergencies. They may find themselves stranded from work if their car breaks down, or they may have to pay for emergency repairs to their furnace if it breaks down during the middle of the winter. Unplanned financial events happen. However, if you plan ahead of time and have a savings buffer, you can weather the storm without tremendous difficulty.

Start by setting aside a small portion of your income and depositing it into a savings account. Over time, if you make this a consistent habit, you will find that you have enough money available to help you during financial emergencies. In the long run, it will save you money in avoiding the high interest rates charged by payday and short term loan companies.

Tip #2 – Keep an Emergency Credit Card Available

While many people are struggling with credit card debt these days, it can be possible to have a credit card available for emergencies only. There are a number of different types of credit cards you can get for this use only.

If you have poor credit, consider taking on a secured credit card. This is a credit card that requires you to open a savings account in order to maintain the credit card. While this keeps the money tied up in a savings account, you will be earning interest on your savings account. As a result, if an emergency comes up, you will not only have the money available to help but you will also be using your money smartly and making it work for you.

Tip #3 – Maintain a Good Credit Rating

Very often, the reason people turn to payday loans is that it is not possible for them to get a short term conventional loan from a bank due to their credit rating. If you make an effort to keep a good credit report by paying your bills on time and keeping a good debt to income ratio, you will find it easier to get credit when you need it.

If you already have poor credit, then make an effort to improve it. Get a current copy of your credit report – you are entitled to one free one every year according to federal law – and challenge any erroneous or inaccurate information it. Recent reports indicate that approximately 80 percent of credit reports have some negative or erroneous information on them. Make sure to challenge anything that you have a question about or brings down your credit rating.

Tip #4 – Budget Wisely

Frequently, people turn to payday loans because they simply do not budget wisely. If you live paycheck-to-paycheck, then work on developing a budget and sticking with it. Taking out a payday loan will cost you more money in the long run due to the high interest rates they charge. If you find it difficult to make it from one payday to the next, evaluate where you are spending money and make changes accordingly. You should not be spending more money than you bring in each payday.

Tip #5 – Know Your Options

Many employers will allow you to request an advance on your paycheck a certain number of times each year. While this is not a good habit to develop, if you have an emergency, it can be an option if you need money right away. Generally, employers do not charge you interest on money they advance you; instead they simply deduct the amount of the advance from your next paycheck.

Payday loans have become a more frequently used source of money for people in dire straights. However, with enough planning and smart money choices, you can avoid using a payday loan and be in a much better financial position.

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