Archive for the ‘A Penny Saved’ Category

Inoculating Yourself from Payday Loans

Monday, August 9th, 2010

There’s an old saying, attributed to Benjamin Franklin, that says, “an ounce of prevention is worth a pound of cure.” Those were the days before vaccines and inoculations were even invented, but he was right nonetheless. We propose that the same thing is true of your finances. If you want to stay out of the financial mess that the cycle can get you into, there are some things you can do. And, as Mr. Franklin observed, it’s better to try to prevent the problem before it starts than to be faced with the overwhelming need to take care of it once it sets its claws into you.

A Penny Saved

The best way to make sure that you don’t need to ever take out payday loans is to follow another of Benjamin Franklin’s pieces of advice, “a is a penny earned.”

If you take out a payday loan, you’re probably going to take out the max that you can. Simply put, if you didn’t really need the max, you wouldn’t be taking out a loan. Then, you will be paying 10%-14% interest on it every pay period until you pay it off and don’t re loan.

So, figure out what you would be qualified for. Calculate 60% of your take home pay (the typical maximum payday loan) by multiplying you’re a typical paycheck by 0.6, then figure 10% of that (multiply by 0.1)  to figure out how much interest you would be paying every pay period with a cash advance.

For example, if you take home an average of $300 per week, 60% of that is $180. And 10% of $180 is $18.

Now, think ahead. If you can save that $18 every week (or whatever your amount comes to), it won’t be long before you have a whole paycheck in the bank. At any rate, it only takes ten paydays before you have saved as much as you would be able to borrow from a payday loans store.

Now, if you have an emergency, you can borrow from yourself. But, make sure that if you do, you repay yourself. This is what people used to do before payday loans came along with a quick solution that ends up getting us into more trouble than it gets us out of.

Build Your Credit

Benjamin Franklin didn’t say this. Our dad did. He wasn’t as eloquent as the great statesman, but he had good advice. Start using credit responsibly and sparingly when you don’t really need it, pay the payments on time, and if you do hit a real need that takes more money than you can afford, you can take a much cheaper personal loan instead of a payday loan.

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