With over 12 million Americans using payday loans every year, it is clear that much of the population relies on this form of short-term lending to cover their expenses when they need to borrow money online in particular. Payday loans have a long history in the US and different states have different laws when it comes to payday lending, how they can be borrowed and who can lend money.
It is possible to borrow smaller amounts of money, as in the case of a $500 loan or even $1000 loans, or larger amount of money, even up to as much as $35,000.
In general, payday loans in the US are utilized by borrowers when they are facing a financial emergency like increased grocery costs or even more expensive than usual utility or medical bills.
What Do Americans Use Payday Loans For?
The designated purpose of a payday loan is to cover short-term emergency payments. Payday loans should be used to cover expenses which arise between paychecks. They are usually only small loan values on a short-term basis with the intention that the loan is paid back on or around the borrower’s next payday.
However, although that is the true purpose of a payday loan, it is clear from recent data that many are relying on payday loans to fund other expenses.
Research from the Pew Charitable Trusts shows that only 16% of payday loan customers use payday loans for their true purpose (covering emergency unexpected expenses). A staggering 69%, according to the same data, shows that payday loan customers are using the loans to cover recurring payments including rent, mortgage payments, utilities or paying off their credit card bill.
What Are The Most Common Uses For Payday Loans?
Despite their true purposes, payday loans are commonly used to cover credit card payments, rent or mortgage payments, cars or other vehicles, utilities or groceries. With the coronavirus pandemic worsening the financial situation for many, more and more people have had to rely on this form of short-term lending in order to cover their basic expenses.
As inflation rates soar and everyday goods become increasingly expensive, many households have found that they are unable to meet their regular monthly payments. Subsequently, more people have turned to short-term loans in order to cover costs.
Using Payday Loans For Debt Consolidation
A large volume of payday loan borrowers use payday loans to try and pay off existing debts including credit card bills or another loan.
Although taking out a debt consolidation loan in order to pay off outstanding debt and reduce overall debt can sometimes be a good strategy, payday loans usually incur extremely high interest rates. This means that you may end up paying more and getting yourself into yet more debt.
Paying For Recurring Payments
Many Americans turn to payday loans in order to cover their fixed monthly outgoing payments, namely their utility bills. This includes water, electricity and gas.
With the cost of basic living increasing dramatically in recent months, and wages staying the same, people are finding that their monthly bills just keep going up and up. As such, payday loans are an easy way to get money in order to keep up with utility payments and avoid the risk of missing a payment and having water, gas or electricity cut off by providers.
Loans For Medical Bills
Medical care in the USA can be very expensive and for some people, it can be very tough to be able to afford even essential medical procedures. It may be for example, that you need to borrow $2000 in order to pay for some routine dental care that ends up requiring more in-depth treatment.
In some cases, it may even be a medical emergency that requires fast payment and therefore, it may not be possible to wait until your next payday. Rather, you might need to take out a payday loan to cover medical bills and similar costs as you need it immediately, rather than being able to wait for your next payday from your employer.
Why Do So Many People Use Payday Loans?
One of the main reasons that people use payday loans is due to their accessibility. Payday loans are known to be one of the easiest loan types to be approved for and do not require a hard credit check. This means that for individuals without a credit history or with a bad credit score, it can still easy for them to gain quick access to a loan. However, always remember that not repaying loans is one of the most common reasons for people having bad credit in the USA, with missed payments showing on your credit record and acting as a negative indication to lenders.
Another reason is the convenience of payday loans. The majority of payday lenders can guarantee quick access to funds. For those in a bind, payday loans can be a great way to get money fast without the need of waiting for a credit check or waiting for funds to be transferred. Most payday lenders can offer same-day funds.
Is It a Bad Idea To Use Payday Loans To Cover Recurring Costs?
If payday loans are used for their designated purpose (i.e. small amounts of money to cover unexpected expenses between paychecks), there is no reason why they cannot be used safely.
The risk comes from using payday loans to cover recurring costs and becoming reliant on them. Due to their short-term nature (usually two to four weeks) they incur very high interest rates. This means that if you become dependent on them, you will trap yourself in a perpetual cycle of debt and end up paying more in interest rates than the original amount of the loan.