Payday loans are an important tool to help people navigate urgent expenses or a mid-month cash shortfall. But it's important to use them correctly and ensure the loan is repaid on time to avoid fees and added interest.
Budgeting can help borrowers manage their payday loans responsibly.
What is a payday loan?
Payday loans are short-term loans designed to provide borrowers access to same-day funds of up to $1,500. Borrowers submit a pre-authorized debit form which allows lenders to withdraw the principal plus an additional fee from the borrower's account on their next payday.
Borrowers can use payday loans for any purpose, including paying bills, buying groceries, or managing any other expenses. While payday loans can be beneficial, it's important to repay them on time. Budgeting may help borrowers build a strong loan repayment strategy.
Budgeting for beginners
A strong budget begins with listing all sources of income. Consider all income, including wages, side hustles, gifts, dividends, alimony, child support and monthly interest if applicable. Now add up monthly expenses. Expenses usually include rent, loan payments, grocery expenses, childcare, etc.
Subtracting the expenses from the income leaves budgeters with their monthly discretionary or disposable income. Most people spend some of this money on leisure expenses and either save or invest the rest.
Payday loan budgeting tips
Like any other loan, payday loans must be repaid on time. If the borrower's account has insufficient funds on the repayment date, they may have to pay their bank an overdraft fee. They may also be responsible for late fees or interest payments if the payment is not processed. These budgeting tips can help borrowers avoid this issue.
Remember that repaying the payday loan may mean losing a chunk of next month's wages. Budgeting for next month in advance could help borrowers avoid having to borrow again very soon.
Identify the amount to be repaid (principal plus fees). It's usually a part of the loan agreement, though borrowers can also ask their lender's representatives for help figuring out the amount.
Include the amount as a one-time expense in the monthly budget.
Borrowers may need to hold back on discretionary spending to accommodate this new expense.
It may also help to review the overall expenses and cut back where possible. For instance, some people may be able to look for slightly cheaper groceries or hold off on non-essential household spending.
A spreadsheet or a budgeting app may provide more clarity and help borrowers stay on top of their finances.
The bottom line
While payday loans are easy to obtain for most people, it's important to remember that these are short-term, high-interest loans that offer the best value when borrowers repay them in full and on time. Creating a thoughtful budget that accounts for repaying the payday loan can help borrowers repay the loan efficiently and avoid late fees, interest and possibly overdraft fees.
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Payday loans are an important tool to help people navigate urgent expenses or a mid-month cash shortfall. But it's important to use them correctly and ensure the loan is repaid on time to avoid fees and added interest.
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