Using payday loan is useful as a last resort after exploring all options

Using payday loan from a non-traditional finance companies may be your last resort for short term loans, but it comes with high interest rates.

By: Hitesh Khan/

You may need a personal loan for a number of reasons — perhaps to deal with unexpected medical expenses, to consolidate high-interest credit card debt, to expand your business, or even to take that well-deserved vacation. Unfortunately, if you have borderline or bad credit, personal loans may be difficult to get at most banks.

If this is the case, you can resort to using payday loan from companies that loan money for short periods of time at very high interest rates.

Bad credit personal loans represent an under-served market, mainly because most banks have plenty of available business without dipping into that particular higher-risk pool. Many personal loans through traditional banks are unsecured, meaning that the bank accepts that you are a low risk to default on the loan and is willing to loan you money without collateral.

Unless you are willing to accept a secured loan backed by some form of collateral such as a savings account, fixed deposit, or equity in your home, you generally need a high credit score to qualify for a personal loan. Fortunately, innovative lenders are available to offer personal loans, even if you have bad credit.

They focus on the niche between a traditional installment personal loan and a short-term payday loan.

These independent lenders generally lend on the principle that the greater the risk that you represent to the lender, the higher the interest rate on the loan. Interest rates on loans with bad credit tend to start at a very high range.

Before approaching lenders for a payday loan, it is important to check your credit score before applying for a personal loan to make sure that there are no mistakes in your credit profile and that the offers you receive are in line with your true credit history. It takes time to correct any errors that you find, so make sure that you check your credit report for accuracy well before you apply for a personal loan.

Lenders do take credit scores into account, but they also realize that a credit score is only one part of risk assessment. Careful scrutiny will be given to your income level and the likelihood that your income will remain stable over the life of the loan.

If you are using payday loan because you inadvertently overdraw on your account, consider overdraft protection. Develop a savings plan. Three to six months’ worth of expenses in an accessible savings account is recommended, but anything is better than nothing. A hundred dollars set aside for emergencies can save you a trip to the payday loan company – and a tremendous amount in fees.

Understand the root of the problem. Are you spending beyond your means because you’re income is insufficient to live on, or because you’re spending more than you need to on non-necessities? You must also consider if there are other ways to generate money.

When difficult financial situations do happen, consumers should consider all other available options before using payday loan.

For example, you can ask your bank for a loan. The interest rate cap for unsecured loans is currently high, but it is still significantly lower than a payday loan. You could also request an extension on what you owe. If you have had a good payment history, this may be the best option. Ask about finance and late charges for delinquent payments and payment plans.

If you have a credit card, in an emergency, consider using a credit card to pay your bill. A cash advance on your credit card is often more expensive than a credit card purchase, but still an option. Check with your credit card company to compare rates.

You could also borrow from a friend or family member. If you take inventory of your belongings, you may be able to sell an asset to raise fund for a pressing need. Some employers will also give an advance on a salary. Check with your human resources department for specific regulations.

A payday loan is a good resource for when you are in a tight spot in terms of cash flow. Payday loan will set your finances straight until you can set it proper.