There is a common perception of payday loans as reckless financial behavior. People with the greatest need for payday loans commonly live paycheck to paycheck and have poor credit ratings. Loans are often taken out to cover emergency expenses, such as auto repair or utility bills. Since most of the person's income is already dedicated to covering expenses, it can be difficult to repay the loan while still meeting other obligations.



Exorbitant interest rates are charged on small, short-term loans. A typical fee for a $100 loan is $15, which amounts to 460 percent interest compounded annually. Inability to repay loans can end in extra processing fees and the loan being rolled over into another term. The fee for the first loan becomes principal on the new one. Most states have recognized the predatory potential of payday lenders and passed regulations to limit the misuse of this financial instrument.

The fact remains that short-term, small-value loans can be useful to people with poor credit ratings. However, the need for such loans should be a wake-up call. Responsible financial planning will prevent the need for payday loans in the majority of circumstances. Several steps should be taken before and after stepping into a lender's office to prevent further damaging credit and stability.

Creating a Budget Beforehand

It is tempting to work up a budget in your head and leave it at that, but there is no substitute for paper and pen here. Writing out a budget will ensure that every expense is accounted for, which is necessary to both assess the need for a loan and ensure timely repayment. Go over all the expenses that must be met by the next paycheck, and determine whether each of these can be put off, reduced, or must be paid on time.
Payday lenders will require a check made out in the amount of the loan plus fee. This will be cashed after two weeks. If money is not present, they will make a new loan and tack on a fee for the check bouncing. The bank will also likely charge a fee for bounced checks. A $200 loan for car repair can quickly take the cost of the repair to $300 or more without an accurate budget.

A budget will also help determine whether the loan is really necessary. They are easy to get, and this alone makes them dangerous. Payday loans should be avoided if possible by always using a budget. Credit agencies recognize that use of the loans is a sign of poor planning skills, and use of them is factored negatively into credit scores. Accurate budgeting can prevent the need of a loan in many cases.

Emergency Planning

If you determined there is a real need and ability to repay, it is time to assess your planning skills. Most people recognize the need for insurance to cover unknown future expenses related to medical care, auto accidents, fires, and so on. Emergency savings is a type of insurance against small costs, like uninsured auto repair or sickness that prevents work. Everyone should strive to have two months of expenses covered by liquid, emergency savings.

Responsible use of payday loans begins with recognizing personal deficits in planning. Non-profits routinely offer free workshops to teach these skills. If you have already faced mounting problems with non-payment of loans, it will be worthwhile to contact a debt relief organization.

Guest author Tim Flores is a freelance blogger and is writing on behalf of Parrot Loans.