Should you get a payday loan? It is not the best financial decision. In fact, it can be the worst financial mistake that a person can ever make. Before considering a payday loan, a person must deal with several critical questions about his finances and the possible consequences of incurring a high-interest debt. Below are some of these critical questions. These questions are not only applicable for payday loans but also for all other kinds of loans.

All loan contracts have provisions for the possibility that the borrower could not pay on time. Usually, the borrower takes the steps to inform the loan company that the debt could not be settled and that the borrower and the lender must revise the original loan contract. The lender is assumed to want the loaned money back and the lender will help the borrower tailor a new agreement that will be suited to the financial capacity of the borrower.

In payday loans, the above process is not followed. The payday loan contract provides for an extension of the debt. The borrower who could not pay off the loaned amount during payday is given the option of rolling over. But this extension of the payday loan is not a free service. In roll over, the borrower is obligated to pay only the interest. In fact, the borrower may keep paying the interest for several months. This may sound a great deal for borrowers until the interests paid every payday are summed up. The total interest paid is probably double or triple the amount of the principal.

Before getting a payday loan, it is prudent to compare the interest rates of other loans. The comparison is in terms of APR or annual percentage rate. The APR compares the interest paid in one year with the loaned amount. Mortgage loans and home equity loans can have APRs between 5 to 10 percent. Car loans have APRs between 6 to 12 %. Credit card APRs are between 13 to 30%. Obviously, the APR of a credit card is higher than the mortgage loan.

The interest on payday loans, which is usually $25 for every $100 within two weeks, appears to be manageable and even acceptable. But when it is translated as APR, the interest on payday loans is between 650 to 800%. This means that within a year, if the payday loan is not settled, the borrower may end up paying 8 times more than the amount loaned.

Another thing to consider before getting a payday loan is the nature of the need for money. Is it really an emergency? Or is it just to buy something that can be considered trivial by others? Incurring a debt to simply buy clothes is irrational. Getting a payday loan so that there is money to buy food during a party is almost absurd. And the most important critical question to answer is the following.

An employee always has a general idea of the actual amount that he receives every payday. Thus, it is logical to assume that this employee will create a budget that will be within his means. That is, the paycheck should cover all household expenses. But, many employees always arrive at a shortage of money. There is also no money set aside for emergencies. What are the reasons for this situation? It could be that the expenses are larger than the paycheck. It could be that the employee does not know good money management. In such financial dilemmas, a payday loan is not the answer.

In answering the above critical questions, a person realizes that the payday loan is not an option at all. Payday loans are debt traps that must be avoided at all costs.