Hmm…Should I get a payday loan for the holidays?

Many of you may relate to my dilemma – I’ve got so many Christmas gifts to buy but I have no idea where the money is going to come from. Lately, I’ve noticed a lot of payday loan ads and as I set out to do my holiday shopping, I’m wondering if any of them would be a good fit for my needs. This year, especially, I’m a bit strapped for cash as I don’t get paid until the end of the month and my bonus won’t be paid to me until mid-January next year. I stopped taking out any credit cards – to avoid temptation – but now I’m a bit angry with myself as I could have used the credit card to pay now and delay the payment until I get my bonus. The question nags at me…what to do?

Enter…payday loans…

After doing some research, I see that payday loans are often called a payday advance too. Whatever you want to call it, these loans are small, short-term unsecured loans. Traditionally they’ve been linked to a borrower’s payday with the amount borrowed due when the borrower is next paid. So, when you take out these loans you’re often asked to show proof of your pay so the lender knows how long they have to wait for the cash. I’m OK I guess as I have all my payroll and employment records.

Although it sounds like a good idea and pretty close to what I’m looking for, I’m a bit hesitant. I recently read an article about payday loan companies in the UK and heard a lot of negative things. A few firms over there have targeted individuals who are unlikely to have the funds to pay back the loans. Worst of all, most payday loans come with astronomical interest rates as there is a high risk associated with lending this money – high default rates are standard. But what nags at me is if these individuals are such high risk – why lend them the money in the first place? After the article I realize that a number of these lending firms may be doing this on purpose to earn a lot of money on interest when they do get the money back. This bothers and worries me to think I could fall victim to the same. I’m not sure if things are the same here in Canada – I should hope not – but you never know. I guess it could be OK as I know that I only want the money for the short-term to get what I need for the holidays. I’m still not 100% convinced though.

You’re not alone…

At the holiday season, many Canadians deal with the same conundrum. It’s tough sometimes to figure out how you’re going to pay for all the expenses associated with the holidays. Unfortunately, despite the challenging economic environment, prices of holiday-related items keep going up. As a result, many people who love the holidays and don’t feel like they should have to scale back take on excessive debt and even go down the payday loan route. In 2011, spending on Christmas went up by more than 2% and people had to deal with a range of debt to pay off in the New Year. I guess it’s up to me to decide what makes the most sense.

Payday loans are an option I guess if I’m totally confident I can pay the loan back once I get paid. I’m about 95% that’s the case. However, I’m just worried that I’ll start spending beyond my means and then get stung with a massive amount of interest. This is one thing that I don’t want, that’s for sure.

What are my options?

I sat down and worked out what my options were in order to sort out the holiday season. Here’s what I come up with:

1) Take out a payday loan for a fixed amount: if I do decide to do this, I want to ensure that I take out a reasonable amount that I know I can pay back with no issues when I get paid at the end of December. To figure this out, I need to calculate all of my expenses and my expected income. The upside of this is that I can still stay within my means; the downside is obviously that I’ll have to pay some added interest depending on how much I borrow.

2) Scale back on gifts and the holiday meal: one thing I am trying to avoid is doing this option. The reason is that my family, friends and I don’t give any gifts to another throughout the year (even birthdays) with the view that we go all out at Christmas. Now if I go against our little deal, I’ll feel a bit awkward about it. Also I offered to cook and host everyone for the family meal. So I’ll feel a bit down – after working really hard this year – that I couldn’t do it in style.

3) Come to a compromise: after thinking about it, I realize that there are some things that I could cut back on gift-wise. I could make a list of all the family and friends I have to do gifts for and fix a budget for each. I often start buying gifts out of my typical circle and I have noticed that this is where my spending gets out of control. Also, with me hosting the family meal, I guess I could always ask everyone to contribute in some way by bringing some food. This could help me save money and time on the day – also it will add a bit of fun making it like a pot luck event.

As much as I love option three, I’m still partly leaning towards getting a payday loan. I spoke to a friend who took one out and she told me that there have been a few reforms in Canada around them. First of all, to prevent unreasonable and excessive rates of interest, some jurisdictions limit the annual percentage rate (APR) that payday lenders can charge. The APR is typically substantially higher than credit cards since payday loans often carry substantial risk to the lender, with an average loan default rate of 10-20%. I guess I could find out which has the most competitive rate. Since I plan to pay it back when it’s due, I want to minimize the interest I would get charged.

I decide to sit on the idea for a bit before making a decision. In the meantime, I’ve decided to make a budget and see if I can afford option 3. I feel that giving myself a bit more time will help me get the clarity I need. The moral of this story? Don’t rush into anything – take the time to see if a payday loan is what you need and to help you reinforce that you will be able to pay it back right when it’s due.