Why There is a Place for Payday Loans
Most consumer advocates, and even some banks, frown on payday loans. They get a bad rap because of their really high interest rates. But, there’s a place for payday loans in today’s economy if you’re responsible with them.
Bankers Are Conservative
First things first. Understand that bankers are really conservative people. You’ve probably heard people complain about bankers not lending money when people need it, but lending it when people don’t. Yes, that’s pretty much how they operate – and for good reason. It’s difficult to make money in the banking business.
If lenders lend to people who can’t repay the loan, then they’ll go out of business (i.e. go “bankrupt”). But, if you have a high income, you don’t need a payday loan, right? Wrong. There are some reasons why high income earners use payday loans that have little to do with immediate financial need.
A Small Business Loan
If you have a part-time business or hobby that needs funding, a payday loan might make sense – especially if you can show the banker that your business is worth funding. Most businesses regularly need cash infusions, and it’s not uncommon to raise $10,000 or even $20,000 for an expansion project. If your paycheck easily clears this in a month, you could get yourself a handsomely-sized loan for whatever it is that you’re working on without tapping into savings.
Speaking of savings, this is another reason to use a payday loan. Sure, you have your super, but you don’t want to touch retirement funds. You might also have investments, but using them means cashing them out. You’ll lose interest on that money and it might set you back many years, even if you only miss out on a year’s worth of interest.
Sometimes, funds just aren’t that accessible or there’s a stiff penalty for cashing out early. An example of this would be a bank certificate of deposit (bank CD). These investments typically assess penalties of 3 months worth of interest if you cash out early. On a 3-month or 6-month CD, that’s at least half and sometimes all of your interest. Not good.
Even though payday loan interest rates are really high, they’re not intended to be carried for the entire year. Some people do, but they’re meant to be paid off quickly. So, you shouldn’t run into the problem of paying the actual APR in full. You’ll only pay a portion of the annual interest. That lets you keep your savings invested, potentially earning you more than what you’re spending in interest on the loan.
Cash Advance On Future Raise
Let’s say there’s a raise or bonus in your near future. But, you’re waiting on it. But, you need money for something. Here’s where a payday loan comes in handy. You can get the money you need now, and pay it off when you receive the money from your company. Why not just wait for the raise? There are a number of reasons why this might not make sense.
For example, if it’s a bonus for holiday, you might need the money in advance to pay for gifts or a plane ticket. Obviously, you can’t wait on it. Rather than write off these types of loans as “predatory” and unnecessary, it might make sense to sit down and analyse whether you could actually benefit from one – you might be surprised.
Diane Coleman has taken a few loans in her day. An avid writer, she likes to help others by posting her insights on the internet.