Find out the basics

Sometimes you find yourself in a situation where your finances just don’t make it to the end of the month.

It’s at times like these when you’re strapped for cash and need a little extra money to get you through, that you may be tempted to take out a payday loan.

However these loans usually come at high price and are best avoided.

What is it?

Payday loans are shortterm unsecured loans designed to give you quick access to money. They’re usually repaid after a week or two, when the repayment amount is deducted from your account.

The cost

The fees and interest rates are higher than almost any other type of loan.

By taking out another loan, your expenses will just go up again, setting you up for another month of financial strain. In fact, if you had several debit orders before you took out your payday loan, the repayment could deplete your account funds that you had put aside for another debit order. A bounced debit order would almost certainly mark your credit history.

I still need money

If you absolutely need money, taking out a personal loan may work out cheaper.

Unlike payday loans, with a fixed interest rate, personal loans are tailored to the needs and risk of individual borrowers. If you have an average/ above average credit score, a personal loan may work out cheaper. However, it’s important to figure out the total cost of a loan before accepting one. Be careful to only borrow from a responsible lender.

Prevention

Of course it’s better to not need a short-term loan. But that means ensuring that you always have enough money, even when you are faced with an emergency expense. When you have little left at the end of the month, revise your budget so you can start saving for an emergency fund.

Shirley Smith is Old Mutual Finance’s COO

This article was first published on