What Holiday Payday Loans Can Really Cost You This Season
February 20, 2018 | By Emma Frost
The holidays are a time of joy, a time of friends and family old and new, and if you’re no stranger to the stores, chances are it’s also a time for spending. No time of year makes our schedules quite as hectic or our wallets quite as empty. And with commercial pressures and social expectations, it’s no wonder it’s also the biggest time of year for debt!
Holiday Payday Loans
All this pressure can leave millions of Americans saddled with credit card debt all year round in a high-interest rate cycle. Others may turn to payday loans or other small loans to get them through Christmas. But what about the morning after? Don’t let the ghost of payday loans past haunt your holidays next year – here are the top 3 things to keep in mind if you want to make sure the value of your payday loan outweighs the cost.
Avoiding the Holiday Payday Loan Debt Cycle
It’s no secret that people tend to overspend on their holiday celebrations. And when they do, they tend to turn to credit cards to see them through. Credit cards can be an alluring alternative when the mad dash to the stores is upon us. And that can have unintended consequences on your bank account and our credit score when things don’t go exactly as planned.
When credit cards don’t cut it, payday loans are there to help bridge the gap between paychecks. Some extra cash for gifts and the plane ticket to be home for Christmas might sound good on paper, especially when all the ads talk about relieving that seasonal crunch-time worry for a stress-free season. But information from the Pew Charitable Trusts revealed some important details in 2015 about why taking out holiday payday loans lightly could make your holidays (and new year) anything but.
Part of the problem in the catch-22 of paying for money. Since those costs come into play until much later and are obscured by a mess of numbers, people generally don’t realize how much borrowing money actually costs them in the long-term. It’s all about the quick-fix mentality.
Pew also reported in 2013 that this problem-solution thinking is behind most borrowing decisions – you get cash fast with no questions asked without worrying about approaching your bank or your friends and family for the money you need. And it's hard to blame borrowers when that's how payday loans are advertised.
If you’ve ever found yourself stuck in this payday loan catch-22, you’re not alone.
According to the findings of Pew researchers, less than 15% of all payday loan borrowers are actually able to repay the money they borrowed within the agreed upon time. But these loans are structured so that you’re essentially trading a paycheck later for a paycheck now (for a nominal fee, of course). So chances are unless you have some extra money coming in, you won't be able to catch up by next payday.
Since you still need to address your immediate needs to make your regular payments, you might find yourself in the 85% who can’t make their payment deadlines without a proper plan in place.
Worse yet, almost half of participants in the study reported needing some other form of cash infusion like their cash refund, pawning property, or asking for help from friends and family anyway. Doing one of these in the first place could have saved them a lot of money and trouble, so this is a double whammy for those who took a payday loan to avoid those options.
The Center for Responsible Lending reports that borrowers spend an average of 212 days in debt. By the time it’s repaid, this brings a $325 loan up to $793, all told. But I thought payday loans were supposed to be fast and easy! Well, unless you can afford to repay it immediately, a payday loan can take its toll on your finances over time. That’s why it’s important to understand that payday loans aren’t problem-solvers – they’re financial tools that only work as well as you understand how (and when) to use them.
Alternatives to Holiday Payday Loans
Pew's findings on how people felt about payday loans were mixed, to say the least. While a majority of payday loan borrowers interviewed reported that these loans provided relief in difficult situations, most also expressed frustration when it came to paying them off.
That's no small surprise, given that almost 60% of borrowers are already struggling financially. But it's also easy to see how a fast infusion of cash from a short-term loan could appeal to someone who's already having trouble making ends meet, especially when the holidays roll in.
However, the research suggests that using a payday loan as a quick fix for long-term financial problems is only likely to drag the process out longer than necessary and cost way more in the long run. That’s why it’s so important to diagnose a financial issue early on and make strides toward improving it with every transaction and repayment. Here are just a few ways you can take preemptive action if you’re still in time or corrective action to get back on the right track.
Taking Preemptive Action
Knowing your financial situation and monitoring its development can help you spot trouble ahead and address it before it turns into a real problem. The main ways to improve your personal finances are to stay on top of them by analyzing your spending, budgeting your expenses, using debt-reduction strategies, and always saving money for a rainy day. But it’s not always as simple as it sounds. Here are a few tips to make your preemptive strike on your debt management strategy.
Budget Your Spending
Sure, everyone needs a budget, but everyone has different budget needs – there’s no one-size-fits-all budget solution, but there are a lot of methods you can use to hit the ground running. They all start with finding out a couple of key numbers: how much you make, and how much you spend. From there, you can give yourself a better of idea on how to approach repayment and build a budget that works for you and your spending needs.
Don’t know where to begin? Get a read on your current personal finances by finding out exactly how much you make and go down your expenses to see all the places your money goes off to. That way you can see where you’re overspending and could stand to improve. After all, the first step to fixing a problem is realizing it’s there! You can find all sorts of budgeting apps to help you along the way so you can keep your financial resolutions this year!
Save Up for a Rainy Day
Managing your debt should really be your next priority in financial wellness, but saving so often takes the backseat when it comes to building an effective budget that it’s worth mentioning sooner rather than later. Saving money might not be the most fun way to use your funds, but it’s good to have 3-6 months of expenses saved up in case of an emergency. So, if you haven’t started saving already, you should definitely start now!
Don’t think you can do it alone? There are also lots of apps that can help you get more bang for your buck! But the best way to guarantee you save is simply by automating it. You should always keep a careful watch on your finances, so you might think setting that cash aside yourself every paycheck is best, but automating your savings with every paycheck is the best way to make sure you pay yourself first.
Manage Your Debt
It’s important to see both sides of the debt management coin. On one side is debt – that four-letter word no one likes to hear; on the other is credit, and how you use that credit shows lenders (and sometimes even employers) how responsible you will be with your money, and thus, theirs.
In order to keep your credit score healthy, it’s important to strike fast and hard at those debts and pay as little interest as possible by making your payments quickly. If your credit score has also fallen on some tough times, it may also be an opportunity to recover it.
The snowball method is one way that individuals have gotten debt-free faster: you start with paying off your smallest bill and move on from there, building momentum with each payment you make. The point is to roll the amount you would have been paying toward the last debt into the next, so the more you do it, the more progress you’ll make! And the more progress you make, the higher your score will be. If that sounds exciting to you, research the snowball method and other debt-tackling hacks for a better handle on managing your credit situation.
No one likes asking for help, but it’s important to do so in time, and not wait for a situation to spin out of your control. That’s where other, more serious actions might need to be taken to protect your financial security.
Knowing When to Borrow
So, what do you do if your credit score is already lower than you’d like it to be and you don’t have the luxury of the financial support of your friends and family? Isn’t that exactly what got us here in the first place? Well, before you start to panic, remember there are different types of help out there. If your debts have gotten a little out of hand, consolidating your debt could help you get back behind the driver's seat when it comes to your finances and your life.
Consolidating Your Debt
When you consolidate your debt, you’re rolling your high-interest debts like credit card bills into lower, more reasonable payments. It could help you get debt-free faster and save money. As long as your debt isn’t too much to handle already, and you have a solid plan of attack, consolidating your debt could be the difference between getting debt-free and missing your opportunity. Use BankRate.com’s debt consolidation calculator to see if this could help you get your debt in check!
The Real Cost of Holiday Payday Loan Debt
We’re never more aware of our finances than when they leave something to be desired. And the holidays bring that kind of money stress right to the surface. Payday loans can be a helpful source of cash when an emergency expense comes up. But when they get used for frivolous spending that you can’t actually afford, it can start a holiday debt cycle that spills into the new year and beyond.
Image Long story short, if we’re bad when it comes to our finances, it could payday loan coal in our stockings. And if you don’t clear that debt quickly, that debt can avalanche into the next year.
Still in that holiday payday loan debt? It’s time to break the holiday debt cycle before it starts and adjust our thinking to get a healthier mindset about our money. Get out of the holiday debt cycle once and for all or steer clear of it in the future. Hopefully you’ve learned some good financial information you may not have already known about the happiest time of year, and how you can keep the payday loan coal out of your stocking next Christmas!