Steps
1 Evaluate all options before deciding to accept a payday loan. Other options include selling possessions, finding additional income sources and taking out a traditional loan.
If borrowing is your best option, look for the loan with the lowest interest rate. People with bad credit will have a hard time finding a favorable rate of interest. Lenders will balance the extra risk they take in lending to borrowers with low credit scores by charging higher rates. Payday loans can carry extremely high rates. Don't take out such a loan unless you have absolutely no other option.
Assess informal loan options. Before stepping into a payday loan (with its typically usurious interest rate), consider whether a friend or family member would be willing to provide the same loan at a much lower rate.
2 Assess all fees involved. Many payday lenders will add huge fees onto a loan. Keep an eye out for these in the fine print of the agreement, and avoid getting into a loan that is more expensive than it first appeared.
3 Identify all eligibility issues. Often lenders have some significant eligibility rules for payday loans, because they want to make sure that their borrowers won't end up defaulting. Such rules may involve income, age and other factors. Be sure you understand these before you apply for a payday loan.
4 Establish the value of your next paycheck. Payday loans are made with that in mind. Lenders will consider your basic recurring expenses and then probably limit the loan to a percentage of your monthly or weekly income. Work with the lender to establish an appropriate amount for the loan. Neither you nor he wants to see a default.
Tips
One scenario in which a payday loan could be appropriate is a situation in which you are assured of extra income arriving soon, such as a tax refund or a gift or inheritance. The payday loan could help you meet expenses until the windfall arrives. (Be very sure that the money will arrive as expected. Remember the high interest you will pay on the loan.)
You can use a payday loan -- or any formal loan -- to help rebuild your credit, but only if you repay the loan in full and on time. A higher credit rating will help you avoid the necessity of a payday loan in the future.
Warnings
Before signing any loan agreement, do a final review of all interest rates and fees, as well as future interest rate "rollovers". (Those occur whenever a borrower fails to pay back the entire loan on time.) The Federal Trade Commission and other watchdog agencies often warn borrowers that many payday lenders are notorious for sticking borrowers with excessive debt.
Ask the most financially savvy person you know what he or she thinks of payday loans. That person may be able to suggest to you a better option.
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