How do I Know if I Can Afford a Payday Loan?

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You know, I have no degree in finance. Could you please explain in an accesible manner how to understand if one can afford to borrow or not? There must be some simple steps or some kind of a checklist there that simple people like me can understand. What is it all about?
– Kim

The Answer

One of the reasons why consumers are sometimes warned of the dangers of payday loans is because there is a tendency for customers to apply for them even when they cannot afford them.

Accumulating the Debt

If you take out a payday loan which you cannot afford to pay back on time, you may find yourself borrowing money again to pay for the loan and interest. At this point, you can sink deeper and deeper into debt.

Prudent Calculations

The key to preventing this is to make sure that you can afford the loan you are considering. To do this, you will need to calculate the total amount of interest which the credit will accumulate over its term and add on the principal. You also need to account for any fees which may be charged as part of the lending process.

Once you know the total amount, you’ll need to calculate how much money you expect to have available to repay the loan when it comes due.

So imagine that you are waiting for a late paycheck for example. You’ll need to run the calculations above and check to make sure that your next paycheck will cover the entire amount due on loan on time.

Spend the Money for the Right Reasons

Most consumers who fail to pay back their payday loans have either incorrectly calculated the amount that they will owe, or they have used the loans in inappropriate situations.

If for example you have just lost your job and you do not know when you will have more income, a payday loan is not a suitable option for paying your rent. It may solve your short-term problem, but will likely become the source of a long-term problem.

Trustworthy lenders that operate with transparency and responsibility will ask you to verify your income to help you avoid situations like this which can result in debt spirals.

Reviewed by: Casey Bond
Date Reviewed: Mar 28, 2019

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The answer on this page is provided in collaboration with some of our trusted lenders who are proud members of the Online Lender’s Alliance. The purpose of the provided answers is to inform the consumers about the specifics of online lending. It should not be treated as legal advice or regulatory guidance. The information is updated periodically and may include links or references to third-party resources or content. SDL365 does not endorse any third-party nor does it guarantee the accuracy of the third-party information. We encourage you to consult other resources that might serve your needs and take into account your particular situation.

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