Payday loans can play an important role in a carefully planned borrowing strategy.  As the term implies, payday loans are designed to finance unforeseen expenses and cover temporary cash flow problems until the borrower’s next payday comes round.


With careful planning, payday loans help pay urgent bills much faster than borrowing from most banks and building societies, with money sometimes credited to a borrower’s bank account the same day a loan is requested.


Without careful planning, payday loans can explode to a massive debt the borrower has no chance of repaying.


Unless he wins the lottery, of course!


That’s usually because payday loans are among the most expensive ways to borrow money, not just for the high interest typically charged, but because of additional fees sometimes charged for initiating a loan agreement, as well as penalties for late payment and loan term extensions.


High fees are also the result of payday companies lending to clients turned down by banks and some other lenders for having a poor credit history and being a bad risk on their investment.  And that is why much of the interest charged by payday lenders goes to chasing late payers and taking legal action to recoup their losses.


Those hefty fees apply equally to dishonest debtors as to others intent on repaying their loans at the earliest possible time.


But what if responsible payday loan borrowers face financial setbacks before their next pay check arrives?  What happens then?


The answer is that punitive penalty fees will be applied, with compound interest accruing over subsequent extensions to the loan agreement, sometimes to the point where loan repayments exceed a borrower’s salary, and the loan becomes an insurmountable problem.


Common reasons why borrowers experience difficulty repaying their payday loans, as well as having to pay back more than they originally anticipated, is failure to read the small print in their loan agreement, and not asking themselves important questions before signing on the dotted line.


Now let us consider questions potential borrowers should ask themselves, by scrutinizing their loan agreement, and by asking questions of lenders and consumer protection authorities.


Starting with:


Why do I want the money I’m thinking of borrowing?


The answer might be to pay an urgent bill, before the electricity gets cut off, for instance, or the bailiffs call to repossess the family home or car, both viable reasons for most people to borrow from responsible payday lenders to solve an urgent problem.   Unlike, for example, someone taking out a payday loan to buy a more expensive Valentine’s Day gift for his fiancé than friends are spending on their girlfriends.


Am I over-estimating the amount of money I need?

Do I have to wear a thousand dollar dress  to my sister’s wedding next week, or will I look just as good in a secondhand outfit from a local charity shop or a dress borrowed from a friend?  Again, if the reason for borrowing money is trivial at best, a payday loan is not the best way forward.


Do I really need to borrow?


Or can I make the money I need by selling household castoffs on eBay, for example, or seeking a low cost loan from family and friends?  Can I do a few odd jobs, such as gardening, or working weekends in the local supermarket?  A “yes” answer to any of those questions makes a payday loan an entirely inappropriate and costly solution to a short term cash flow problem.


Do I need money right away or will my bills wait a little while longer?

Could the cash-strapped individual ask lenders for more time to pay his mortgage or hire purchase on the family car?  Might his bank or building society offer short-term overdraft facilities to cover urgent debts until the borrower receives a backdated payrise, for example, or the check arrives for a stamp collection he sold on eBay last week?  A lower cost alternative to payday borrowing, or the chance to repay debts when his bank balance improves, are good reasons to avoid taking out an expensive payday loan.

If answers to all those questions leave no option but to apply for a payday loan, it’s time to consider other important matters, such as:


Can I afford to repay my payday loan in full and at the appropriate time?


Nothing but a resounding “yes” to this question will do, unless the borrower genuinely enjoys being chased by debt collectors and bailiffs.


Is the payday lender licensed to lend, or is he a loan shark?


Most advanced countries require lenders to be officially licensed by central and local government, as well as abiding by strict rules laid down by financial and consumer watchdogs.   If a lender doesn’t abide by strict guidelines, his license will be withdrawn, so the next question is:


How do I get to see the payday lender’s official license?


If a lender can’t show his license, either physically or on his website, that’s usually because he doesn’t have a license, and has so far evaded the police and government authorities.


*  Is the lender respected by national consumer protection agencies?

Most countries have their own special watchdog companies charged with upholding standards of professionalism among lenders.  Ask at your local bank or building society if you don’t know the official representative in your country.


If a payday lender isn’t on favourable terms with official watchdogs, give him a miss and look elsewhere for your payday loan.


And there you have it, a few questions taking just a couple of minutes to answer, and ensuring you never fall foul of an unsatisfactory payday loan agreement.