Is There a Way to Use Payday Loans Responsibly?

Payday loans have a bad reputation due to their high interest rates.

These loans cater to people with low incomes and those who are in financial trouble, and some people find this to be somewhat predatory.

While budgeting carefully and maintaining money in the bank between paychecks is always the best policy, sometimes this isn’t possible, and people may need money right away.

When used responsibly, payday loans can actually be a great resource for emergencies. Here are three ways you can use a payday loan to save money:

1.Funding genuine emergencies.

If something happens between paychecks that you absolutely must pay for immediately, you may need to take out a loan to cover the cost. For example, your car might break down or you could have a medical emergency. Some people may not have good enough credit to qualify for a credit card to cover these expenses, so a payday loan can work as a good substitute if you have enough money coming to cover the costs.

2. Avoiding late fees.

If your bills come due in-between paychecks, taking out a payday loan may be more cost-effective than paying late fees. For example, some apartment complexes assess a late fee plus daily charges for each day the rent payment is late. If you get paid a week after rent is due, you could end up paying hefty fees. The interest rates on a payday loan might be cheaper than paying these fines.

3. Preventing overdraft.

Sometimes people make mistakes and accidentally overdraft their bank accounts. Charges that hit the bank account after it hits zero will lead to $35 fees for each returned transaction, in addition to any fees the bank charges for dropping below your balance. It might be more cost-effective to take out a payday loan to cover your bank balance and avoid fees as transactions start to clear.

Using a Payday Loan Responsibly

  • Never take out more money than you absolutely need
  • Don’t borrow more than you can pay back immediately
  • Sign up for an automatic bank draft on your payday; this will usually give you a discount with the loan company, and you won’t forget to pay back the loan on time
  • If you end up with more money than you need, don’t spend it; save it to pay back the loan instead

Finally, depending on your situation you may get more utility from a short-term loan than from a payday loan. Short-term loans usually allow you to borrow more money. Rather than using your paycheck as collateral, they are signature loans with very high interest. They’re usually designed to be paid back over a very long time, and the interest can be as much as 400 percent. However, many lenders allow you to pay the loan off early with no prepayment penalty. If you pay off a short-term loan within a week or two of taking it out, the fee may actually be lower than the payday loan fee.

Payday loans should be an emergency backup plan, not something you rely on. If you find yourself needing them frequently, you need to look carefully at your budgeting and spending practices and find a way to provide a little financial cushion. It will save you more money in the long run by avoiding high interest rates.

Guest author Sharon Koontz is a financial guru and freelance blogger writing on behalf of

  1. Why You Should Avoid Payday Loan Rollovers Retweet In an ideal world it would be possible to...
  2. How to Manage Student Loans After Graduation Retweet Student loans are a great way to pay for...