Planning for a vacation but facing shortage of funds? Some might suggest taking out a payday loan for a holiday, but it should be used as a last resort. Let us find out why!
How do payday loans work?
These are short-term cash loans, generally due within a couple of weeks of taking out the loan. You can secure this loan easily – give the lender a postdated check or authorize access to bank account, for the amount of the loan along with interest. In return, you get cash from the lender. When the loan is due, the lender takes out payment directly out of your bank account. If you want an extension of another two weeks, you have to pay additional fees.
Pros & Cons of Payday Loans
- If you have bad credit, a payday loan seems like a great “Hail Mary”. When used effectively, it can be a viable solution to short-term financial problems.
- Application takes just about 30 minutes to complete and the approval process is quite easy.
- Most of these loans have no credit check, a huge boon for borrowers whose residential status or credit history would typically preclude them from approval.
- You get the cash very quickly – it takes about a week (at times even less than that) to facilitate availability of funds. This way you can pay off money owed elsewhere and get your finances back on track.
- Annual percentage rates (APR) of interest are quite high as compared to traditional loans.
- You get caught in a cycle of debt due to exorbitant rates of interest, along with high repayment installments. The added expense of interest and fees can subsequently require additional loans to make ends meet.
- These types of loans also come with lender-favorable terms. Borrowers who fail to read all the fine print can run into trouble if the arrangement goes awry.
Should you use it for holidays?
At first, it seems like a reasonable idea, but you have to ensure that the additional cost of your loan repayment doesn’t put you into financial difficulty. Even if the lenders don’t ask what the money is for, you have to confirm that you understand the cost of credit you are using, and are able to afford repayments. Planning ahead and budgeting for your holiday is a must, or else expenditures tend to go haywire, and quickly shoot up to an exorbitant amount that you might not be able to afford.
What if your vacation is a few months away?
If that is the case, you might need to repay the loan before going away, as payday loans are intended to be repaid on your next payday. However, you can take out a short term, multi-month loan, so the repayments can be stretched out over the next three paydays and you won’t have to repay the entire amount before the vacation. If you have to book flights and hotels before your payday at the end of the month, a payday loan is a good idea.
Are there any alternatives to payday loans?
If you need financial help, enquire about other sources before applying for payday loans. Some credit unions and banks have begun to offer a similar service of small loans but at much lower interest rates. The interest rates usually compare to a credit card rate, at around twenty percent. You might be able to secure a salary advance loan through a bank or credit union or talk to your employer to get an advance against your next paycheck.
A credit card is yet another option as the interest rate charged is much lower than that of a payday loan. A credit card gives you more time to pay back the money, with additional flexibility on how you choose to break the payment up. If you can pay the card off in just a few months, you can keep yourself safe from the expensive payday loan cycle. You might talk to a non-payday lender for a personal loan as the APR is more similar to that of credit cards. If everything else fails, go to a close friend or family member for a loan; use payday loans only if all avenues close up.
If you take out a loan, but realize that holiday costs are higher, so you might not be able to repay in time, you could end up with late fees, while missed payments and negative information cause your credit rating to plummet. Loan payments should be the top priority during a holiday rather than getting an upgraded package at the spa or drinking more cocktails. To put it in a nutshell, don’t use payday loans for financing holidays that you crave, but can’t realistically afford, as you will run into trouble if you can’t repay when the amount is due.