How to Use Payday Loans Responsibly

Whether you call them payday loans, cash advances or something else, it is not a given that short-term loans are always a bad thing. Payday loans are a tool no different from any other financial tool. They can be used responsibly and for very legitimate reasons. The key is understanding how they work so that you do not accrue an unmanageable amount of debt after borrowing.

​Before exploring how to use payday loans responsibly, let's discuss the basics. A payday loan is a short-term loan designed to meet an immediate need without using a credit card or applying for a long-term loan. Payday loans are most often made on a two-week repayment term, coinciding with pay dates.

Payday loans also generally require the borrower have an existing checking account. Lenders require either a post-dated check or access to the borrower's account via electronic withdrawal. That's a brief summary explaining how they work. Now let's move on to using payday loans responsibly.

Use Them for the Right Reasons

Data shows that a stunning 69% of payday loan borrowers use the money they borrow to cover recurring expenses. What are recurring expenses? Things like rent, utilities, food, etc. These are expenses people incur on a regular basis as a matter of course.

The first rule for using payday loans responsibly is to not use them to cover these recurring expenses. If you find yourself doing so, it should be clear that your income is not enough to cover your bills. Payday loans will not change that. You either need to reduce your spending or get a second job.

It is fine to use payday loans to cover unexpected emergencies or special purchases that you know you will have the cash to cover within the next few weeks. That leads us to the second tip, budgeting.

Budget for Loan Repayment

Make sure you have enough money in the budget to repay the loan – before you borrow. For example, let's say you get paid bimonthly. This sort of payroll schedule can present problems in some months if an emergency arises before your next scheduled payday. Let's say your car breaks down. You need your car to get to work, so it has to be fixed.

You plan to borrow $350 to make the repair, knowing that your next paycheck will cover it without harming your budget or your ability to pay your recurring expenses. That's fine. You're good to go. If your next paycheck will not cover it, you might be better off finding an alternate way to get to and from work while you save up the money for the repair.

Along those same lines, you might want to avoid payday loans if you have no formal budget in place. Learn to budget first. Once you've mastered that, you'll be better prepared to use payday loans responsibly.

Don't Accept Just Any Loan

A common mistake that borrowers make is not shopping around for the best deal. This is true with traditional loans as much as payday loans. Don't make that mistake. An important rule for using payday loans responsibly is that you compare as many loan options as possible. Go with the one that offers the best rates and terms for your circumstances.

A payday loan can be a very helpful financial tool under the right circumstances. There's no need to dismiss such loans outright as being bad in every situation. When used responsibly and for legitimate purposes, payday loans can actually be a good option for many.