Unlike a traditional loan, payday loans often need to be rolled over every two weeks. This rollover process is usually automatic, but carries a hefty fee with it. These fees often create a cycle of dependence on these loans--with the average borrower carrying a balance 7 months out of the year.
However, that doesn't have to be your fate. If you're relatively new to using payday loans, a few financial tips can help you avoid these fees. A sound fiscal strategy is essential to paying off the loan in short order and returning to your normal lifestyle.
Understand Your Situation
There are quite a few legitimate reasons why a short-term loan is useful. Often, these loans provide an option for people that are low on cash to avoid large overdraft fees or loss of income related to travel and commuting expenses. However, if you're low on cash, you're probably not in a situation with a large surplus of money each month.
That means you're going to find it difficult to pay the loan back without altering your expenses and habits. For instance, a person who was normally able to save $50 each month would take 10 months to pay back a $500 loan. Considering that this loan might cost as much as $75 in fees each month, the end result is often the accumulation of debt--not financial relief.
Make Big Changes First
In a typical budgeting scenario, you'd look for small ways to trim costs from your expenses. When dealing with short-term loan repayment, this doesn't work. You need to pay these loans off quickly. Otherwise, the fee structure will become a significant problem.
If you have any items that hold a cash value, it might be time to sell them. Pawn shops are a useful tool for generating repayment funds and extending the amount of time you have to repay your debt. However, if these options are unavailable to you, other changes might be required. The most common changes that will free up the most money are:
These types of changes are hard. If you have to make them, keep in mind that the situation is temporary. You will be able to get back on your feet and reclaim these lifestyle compromises in a reasonable amount of time.
Develop a Sustainable Budget
After making large changes, you'll likely find yourself with a remaining balance. Even if you were able to generate the entire loan balance, you're going to need to develop a budget that prevents you from having to take out additional loans. To do this, you'll need to create a budget that allows you to save at least $100 each month.
Fortunately, this isn't impossible--even when living on a modest income. Look for small habits that can save you between 5 and 10 dollars each month. Bringing lunch to work, carpooling, and clipping grocery coupons can often accomplish this surplus. Then, save that $100--even if you don't have a bank account. Eventually, you'll have enough to open one.
Work On Your Credit Rating
The simplest way to avoid taking short-term loans is to have a credit card available. Once you've repaid your loan and created a monthly surplus, credit cards will be accessible to you. Even if they carry a high APR, they will always outperform short-terms loans in terms of their cost to you.
Unfortunately, you can't create a high credit score overnight. Opening a bank account and building a savings will help significantly. You'll also want to make sure that all of your monthly obligations are paid on time. This will be easier when you have a monthly cash surplus. Then, when you do get a credit card, use it for small expenses each month and pay it off on time. You'll avoid interest charges and build your credit score much more quickly.
Short-term loans are a fantastic way to help you avoid the damage done by a financial crisis. When paired with both short and long-term planning, they allow you a hassle-free second chance to achieve financial independence. Continue for additional reading.
One day I realized that I might have a shopping addiction. Every single thing that came across my computer screen or that I saw in stores I felt like I just had to have. It was an overwhelming, ever-present need, and it was really difficult for me. I didn't know what to do about it, so I decided to work with a counselor to overcome my obsession. She referred me to a financial counselor, and it really helped. Within a few months, I was able to see my problem and stop purchasing things that I didn't need. This blog is all about choosing financial freedom.