Resorting to payday loans may seem like a quick and easy solution when faced with unexpected expenses or a financial emergency. This has become even more of a problem nowadays, as many families struggle with paying their monthly bills due to high inflation.
However, before you take out a payday loan, it is essential to understand both its pros and cons. If you’re already short on money, continuously taking out payday loans can lead to a never-ending debt cycle and financial instability.
In this article, we’ll discuss what payday loans are. We will also dwell on strategies to help you avoid getting into a debt trap, and safer alternatives to manage your monthly bills.
What are payday loans?
A payday loan is a short-term, unsecured loan at a high-interest rate. The term ‘payday’ refers to the fact that you must repay the loan when you receive your next wages.
The maximum amount you can borrow varies but is typically not that high, such as $1500, if you’re in Canada. People generally turn to payday lenders for essentials like food, energy, and housing costs. This usually happens when they don’t have an emergency savings fund.
Websites like mycanadapayday.com allow you to apply for loans online, eliminating the hassle of visiting the storefront location and ensuring that you receive your loan within minutes of applying. This is very convenient when you need money in an emergency, and the process is relatively simple.
The loan provider will generally require you to show proof of your income. The lender will then give you the amount. You will have to pay back on your next payday, usually within two weeks to a month.
Payday Loans and Debt Traps
In theory, payday loans sound like a great idea since you get money in an emergency without too much hassle. However, they often have incredibly high-interest rates that lenders charge to take advantage of the unsecured nature of the loan.
High-interest rates can be dangerous for borrowers since they’ll have to borrow more money if they can’t repay the first loan, trapping them in a debt cycle.
So, be sure to consider alternatives. And if you still find it necessary to borrow a payday loan, make sure you have a clear plan to repay the loan on time.
Tips to Avoid a Debt Trap
Once you’re stuck in the debt cycle, it may seem never-ending. However, that doesn’t mean you can’t get out of it. Here are a few tips to help you if you’ve borrowed a payday loan and are struggling with debt.
1. Contact a nonprofit credit counseling agency.
These agencies specialize in helping people struggling with their finances, including getting out of debt. A credit counselor can create a plan to get you out of your debt cycle. He will help you make a budget, manage bills, and explore debt payment options.
They can help you create a debt management plan (DMP) for a small fee. In this case, you pay the agency, which then pays your creditors. The downside of a DMP is that it can restrict your ability to borrow money in the future, as lenders view it as unfavorable.
2. Try a payday loan/debt consolidation program.
The idea of consolidation programs is to borrow money at a low-interest rate. Then use it to repay your payday loan, along with other high-interest debt you may have.
You must repay the loan you take from the consolidation program. But this will be relatively easy since you can pay back every month in a manner that suits your budget.
Another consolidation program is called a debt settlement program. A third party will repay all your loans and charge you a monthly payment.
3. Ask for extended payment plans (EPP).
Sometimes, payday lenders offer EPPs. These allow you to repay your loan over a more extended period. This might not be the case for all payday lenders. So, read and understand all the terms and conditions before signing the repayment plan.
Tips to Manage Your Monthly Bills
Paying your bills on time might seem challenging. But doing so is essential to avoid debt and negatively affect your credit rating. A few tips to help you manage your bills are:
1. Create a budget.
The first step is creating a comprehensive budget that details all your income and expenses. You can further categorize your budget as well. For example, you can divide expenses into fixed, such as rent or insurance, and variables, such as groceries.
You can also get a folder and keep all your bills in it. Or you can enter them into a spreadsheet on your computer as well.
2. Track spending.
Use budgeting apps or spreadsheets to help you keep track of your expenses and identify areas where you can cut back. Prioritize essential expenses like housing, groceries, and transportation. Ensure you pay for these first before other costs.
3. Set up auto-payments.
Setting up auto payments is an efficient way to manage your fixed monthly expenses. You can ensure that your bills are paid on time. This reduces the risk of potential damage to your credit score.
4. Utilize payment plans.
Some utility companies and medical providers offer payment plans and flexible billing options. This enables you to spread the cost of a hefty bill over several months. It makes it easier to manage according to your budget.
5. Consider alternatives.
There are always other options to consider if you struggle to pay your bills. For instance, if you cannot pay your rent or mortgage, you can look for rental assistance programs to help you. Or you can contact the local tenants’ association to see whether you qualify for relief. Housing counselors can help you review your lease or mortgage documentation and refer to assistance programs you might qualify for.
Similarly, if you’re struggling with utility bills, you can contact the utility directly. Then ask for assistance in the form of payment plans or low-income programs.
If a sudden emergency expense arises, consider crowdfunding an option. You can create a crowdfunding campaign and share it on social media for more exposure.
Payday loans must be your last option.
While payday loans may offer you quick cash in times of need, these should be a last option when you need money for your monthly bills. However, if necessary, make sure you have a proper plan for returning it as soon as possible before the interest piles up.
Explore various alternatives to help you according to your situation, like financial assistance. By following a budget plan, you can ensure all unnecessary expenses are cut out, allowing you to pay your bills on time!
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