Could a payday loan get you into financial trouble?
- Payday loans are a type of short-term loan.
- Payday loans tend to have very high interest rates.
- Finance guru Dave Ramsey has provided some advice on payday loans.
If you’re struggling to come up with cash to cover an unexpected expense, payday loans may seem like a viable solution. These loans are often available right away, and can be accessed even if you don’t have perfect credit. They have short payoff times, and typically you’re expected to repay them with your next paycheck — along with fees on top of what you borrowed.
While payday loans are easily accessible, they have some serious downsides including the fact that they are very expensive.
As a result, you’ll want to think carefully about whether this is the best method of borrowing before you move forward. If you’re trying to decide, some advice from finance expert Dave Ramsey could help.
Here’s what Dave Ramsey thinks about payday loans
Ramsey is well-known for being opposed to debt of any kind, so it probably doesn’t come as a 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 into a debt-building cycle that isn’t easy to escape.”
As Ramsey explains, many payday loan lenders charge high fees and give you little time to repay the money borrowed. Because the fees are so expensive, people who take out payday loans often end up having to borrow money again to pay it back.
Borrowers have typically 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’s due. But they then end up having to take out another payday loan right away because the initial loan plus the fees are so expensive that they can’t cover the loan and still 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 could be upwards of 900%.
Because payday loans typically end up being so expensive and leaving you trapped, Ramsey’s blog states that “Payday lenders are the financial industry’s mobsters.”
Is Ramsey right?
Ramsey’s concern about certain types of borrowing — such as mortgage loans — isn’t well-justified. But when it comes to payday loans, the finance guru is absolutely right.
These loans are one of the single most expensive ways to borrow, and payday loan lenders are often predatory and target people who can least afford to pay high rates. As a result, it’s best to avoid these loans at all costs.
Ideally, you will have an emergency fund saved, which is what Ramsey recommends, so you won’t find yourself needing to borrow to cover unexpected costs. But if you don’t yet have money and a surprise expense has cropped up that you need to pay, you should look into 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 cards have high interest rates, they’re lower than payday loan rates — and a credit card offering a 0% introductory APR on purchases may enable you to finance your expense over time without interest charges.
Of course, sometimes payday loans absolutely can’t be avoided. In that case, you should aim to pay them back ASAP and not borrow again so you don’t end up in a debt trap that’s hard to get out of.
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