The adage about there being no such thing as a free lunch holds especially true in the domain of personal finance. Despite the undeniable attractiveness of features such as 0% balance transfers, payment holidays, rewards programs and the like, none of this is free, and the costs can be indirect, well hidden and more significant than you might at first expect.

Even accepting that no kind of finance is going to be particularly cheap, one form of credit, in particular, has gained a reputation as being inordinately expensive: payday loans and wage advances. These kinds of loans are intended to bridge a gap between running out of money and receiving your next paycheck and are widely available online. Are they as expensive as popularly thought?

Most of these loans work on the basis of charging a flat fee when you repay the loan. This fee is usually around $25 for each $100 you borrowed and charged for a single month or credit. However, as it is ordinarily possible to ‘renew’ your loan at the end of the month by paying a new fee, it’s possible to extend your payday loan over many months or even years, and this is where the problem lies. Having to pay a hefty 25% charge each month soon adds up to stratospheric APR figures – whereas a standard personal loan will have an APR roughly in the region of 10% or so, the APR figure for a payday loan will be in triple figures or even higher.

This would indeed appear to make wage advance loans prohibitively expensive, but that’s at least in part because using payday loans for long-term borrowing isn’t how they are intended to work. If your budget means that you regularly run out of cash before being paid, then that is a sign of an underlying problem which needs to be fixed either by restructuring your finances with a consolidation loan or even just cutting your spending down to the essentials only.

A payday loan is best used for when there’s an emergency of some sort, such as a large and unexpected bill that absolutely has to be paid, and there is no other way of accessing fast cash. Even if you find that you can’t repay the loan in full at your next payday, it is a wise idea to at least renew for a smaller amount and so ween yourself off the debt.

Even so, a 25% flat fee is far from cheap, but this in part reflects the fact that credit ratings are generally not a factor in deciding whether or not your loan application will be accepted. The fee also has to cover the bank charges involved in transferring the funds into your account overnight, which are still applied even in these days of digital banking.

To sum it up then, yes, payday loans are costly, especially if misused to provide long-term borrowing. However, if a genuine financial emergency means that you need to get your hands on a small to medium amount of cash, and you need it quickly, then it might well be worth paying the price to get you out of that financial hole.

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