When it comes to payday loans, it's important for the consumer to think critically about what they will end up spending their money on. Is the reason you applied for the loan to pay a recurring payment that will come up next month? Is it to pay for a pair of shoes you have had your eyes on for quite some time but just can't afford?... or is it for an emergency expense that needs to be paid as soon as possible?
The latter of the three scenarios would be the ideal answer. Payday loans are meant for emergencies, not desires. Although this is a great rule of thumb, it's not always the way that the situation plays out. Recent studies have shown that payday loans are becoming less and less likely to cover emergency costs.
Pew Charitable Trusts conducted a recent study in regards to where they payday loan money is going once it is approved. The findings were rather shocking. They revealed that 69 percent of borrowers were using their payday loans to cover expenses such as rent, mortgage, food, credit card bills and utilities. In opposition, only 16 percent of the borrowers were using the loans on an unexpected expense such as a major repair or emergency medical expense.
One can easily see how taking out a payday loan to make a credit card payment is detrimental to one's income. First of all, the loan is being taken out on a recurring payment. Who is to say that in the future, many more loans won't be taken out for the exact same reason, or even worse- the same payment? Secondly, a red flag for a cycle of debt can easily be seen here. This is basically taking out a loan to pay off a loan. When will the cycle end? Clearly this individual's income to debt ratio is less than ideal.
An emergency expense can mean many things. Imagine your car needs a repair that it could otherwise not function without. Oftentimes in terms of vehicles, if you let one part of the machine go- other parts will begin to go right along with it. That is why this constitutes an emergency and would be a legitimate reason to take out a payday loan.
Imagine you are an asthmatic and you are having consistent pains in your side. These aren't just any sort of pain, they are located in the sides of your chest. You fear they could be a result of your asthma or that they could even be heart related. You have insurance but know that a trip to your doctor will result in more fees than you can handle even with insurance. This is an example of another emergency situation. You don't want to take your health for granted. Both of these situations warrant emergencies, and thus- a valid reason to take out a payday loan.
Non-emergency expenses can be slightly more difficult to define. We call rent, utilities, credit card bills, and even food non emergency expenses- yet they still need to be paid for and in some cases are necessary. This is why there is such a blurry line in terms of what we deem an emergency and what we deem to be a non-emergency. When distinguishing for oneself what should be done, that individual will need to think critically and prioritize. Will the power be turned off if I don't pay this particular bill? Have I exhausted all my resources (i.e. food stamps for food)?
Clearly, responsible borrowing is just as important as responsible lending in order to keep finances in check.
