Sometimes there is too much month at the end of the money. When an expense comes up that has to be paid, and the cash is just not there, you have a few options. Perhaps the most common way to use borrowed money to meet an obligation is to swipe a credit card. Other options exist, however, if you are unable to obtain a credit card or prefer not to use one.
One way to borrow funds in a pinch is to take out a payday loan. Payday lenders advance their customers money in anticipation of an upcoming paycheck. Say your car breaks down and the repair bill is $400, but you cannot pay it. However, you get paid a week from today. After the payday lender verifies your job and that you have an active checking account, you write the lender a postdated check for $450, which covers the $400 you need plus a $50 finance charge. You receive $400 and have 14 days to pay it, and the finance charge, back to the lender. If you fail to pay, the lender attempts to cash the postdated check. If this check bounces, massive fees and interest rates start accumulating.
For various reasons, credit cards are preferable to payday loans. They are easier to use, the interest rates and fees are lower, and you do not have to interact with questionable characters to use them.
Ease of Use
As of 2015, the vast majority of merchants and retailers accept credit cards. Even mobile businesses are capable of processing credit cards using smartphone apps. There are few things you ever need to buy that cannot be paid for with a credit card.
Moreover, a credit card provides a revolving line of credit. There is no need to apply for a new loan each time you need to borrow money. Say your credit line is $3,000. As long as you keep your balance below this amount, you can borrow against your credit line as often as you want.
Credit cards, unlike payday loans, allow you to borrow a large amount of money and not have to pay it back right away, or even by the end of the month. Instead, you can chip away at your credit card balance with minimum payments. For a balance of $1,000, for example, your minimum payment might be as low as $30 per month. Interest charges accumulate quickly when you only make minimum payments, but this option gives you flexibility when cash flows are tight.
Lower Interest Rates and Fees
Credit cards are rarely praised for having low interest rates, but compared to payday loans, they are a true bargain. Most credit cards carry annual percentage rates (APRs), which represent a percentage of the total borrowing costs for one year, of between 12 and 24%. Several factors, most importantly your credit history, determine where your rate falls within that range.
Payday loans, by contrast, carry APRs that average over 400% and, in some cases, reach as high as 5,000%. The payday loan example above, in which a person borrows $400 and owes $450 after 14 days, represents an APR of 325% even if the person pays on time and incurs no additional fees.
No Interaction With Questionable Characters
While some payday lenders enable transactions to be conducted completely online, many of them still require you to visit a physical location. These businesses are not located in the best parts of town, and for a simple reason: they prey on the poor and the financially desperate.
Payday lenders are also known for being shady themselves. The industry is famous for its aggressive and sometimes menacing collection tactics when borrowers get behind on payments. To be fair, credit card collectors do not have reputations for being angels, but payday lenders are regarded as truly awful. No part of the payday loan process is easy, pleasant or cheap. Credit cards, while not without their flaws, make borrowing money in a pinch simple and, compared to the alternative, rather inexpensive.