Should you take out a payday loan? This is what Dave Ramsey thinks

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Could a payday loan cause you financial problems?

Key points

  • Payday loans are a type of short-term loan.
  • Payday loans often have very high interest rates.
  • Finance guru Dave Ramsey has provided some advice on payday loans.

If you’re having trouble raising cash to cover an unexpected expense, payday loans may seem like a viable solution. These loans are often available immediately and can be accessed even if you don’t have perfect credit. They have short payment times and are usually expected to be paid with your next paycheck, along with fees on top of what you borrowed.

While payday loans are easily accessible, they do have some serious drawbacks, including the fact that they are very expensive.

As a result, you’ll want to think carefully about whether this is the best loan method before moving forward. If you’re trying to decide, a few tips from finance expert Dave Ramsey might help.

This is what Dave Ramsey thinks about payday loans

Ramsey is well known for being opposed to debt of any kind, so it’s probably no surprise that he advises against taking out payday loans.

In fact, on the Ramsey Solutions blog, payday loans are referred to as “a slippery slope into a cycle of debt accumulation that’s not easy to escape.”

As Ramsey explains, many payday loan lenders charge high fees and give you little time to repay the borrowed money. Because the fees are so expensive, people who apply for payday loans often end up having to borrow money again to pay it back.

Borrowers have typically been asked to write postdated checks or provide access to their bank accounts, leaving them with no choice but to make the down payment when it’s due. But then they end up having to take out another payday loan right away because the initial loan plus fees are so expensive that they can’t cover the loan and still pay their other bills.

The result is that you end up incurring so many fees because you keep borrowing, you end up paying an extremely high interest rate, which could be over 900%.

Because payday loans often end up being very expensive and lock you in, Ramsey’s blog states that “payday lenders are the mobsters of the financial industry.”

Is Ramsey right?

Ramsey’s concern about certain types of loans, such as home loans, is not well justified. But when it comes to payday loans, the finance guru is absolutely right.

These loans are one of the most expensive ways to borrow, and payday loan lenders are often predatory, targeting people who can least afford high rates. As a result, it is best to avoid these loans at all costs.

Ideally, you’ll have an emergency fund saved up, which is what Ramsey recommends, so you won’t need to borrow to cover unexpected costs. But if you still don’t have money and an unexpected expense has arisen that you must pay, you should look for other options.

Same day loans from personal loan providers can be a good alternative, and even using a credit card can be better than a payday loan. Although the cards have high interest rates, they are lower than payday loan rates, and a credit card that offers a 0% introductory APR on purchases can allow you to finance your spending over time without interest charges.

Of course, sometimes payday loans can’t be avoided. In that case, you should try to pay them off as soon as possible and not borrow again so as not to end up in a debt trap that is difficult to get out of.

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