When it is still two weeks until your payday and an unexpected problem arises (i.e., you need to fix a flat tire or visit the hospital), it may be tempting to take out a payday loan to make ends meet. Although it may seem like an answer to your immediate problems, it will probably end up costing you more money in the long run.
Payday loan companies charge extremely high interest rates. Some companies also charge maintenance fees and origination fees for a loan even if you borrow as little as $100. Additionally,these companies will generally let you rollover your debt if you pay the fee. This may seem like a nice feature but you could quickly end up paying more in fees than the original amount borrowed. For example, if you borrow $300 and pay $45 in fees and roll over the loan for another two weeks, you will end up paying $390. If you are unable to pay the loan for two months, you will end up paying $360 in fees – more than the original loan amount.
So, how do you avoid needing to take out a payday loan? The best plan is to save each month to prepare for unexpected emergencies. Even if you are only able to invest $20 into a savings account each payday, that money will start to accumulate and could help you make ends meet when money gets tight.
-Kathryn M.
Sage Personal Finance 