Are Payday Loans Ever a Good Idea?

The current status of banking in the United States is much unlike any culture in the history of the world. There is much more capital to invest, and because of fractional reserve banking, there's just so much money to loan out. Before only people who could surely pay off a loan would be able to get one, but this is no longer the case. The sheer amount of money available to be loaned has increased so dramatically that bankers and finance companies have found ways to make it mathematically viable to loan money to people who won't always pay the money back.

One of the most common types of these sub-prime loans is called a payday loan. Essentially, you will give the finance company a post-dated check for the amount of your paycheck, and the amount of money that they will give you in cash is a bit less than the amount of the check you give them. A week or two later, your paycheck comes and they cash the check.

The idea seems simple enough, but many people have accused payday lenders of preying on the lower class. When you look at the mathematics of payday lending, you can see why. Quite often the interest rates that they charge are anywhere from 400% to 800% on an annual basis. This is much more than any normal person would think is reasonable to pay. There was even a recent piece of legislation which prevents these companies from being near military bases, because so many servicemen fell into the payday loan trap. Their debt to income ratio would become so high that they were deemed a security risk because they would be more likely to accept a bribe!

We know that payday loans are not the best financial product out there, but are they ever a good idea? What if you need money to put gas in your car or to pay for groceries? After all, you have to eat and drive to work! Is it okay to get a pay day loan then? Many people would think of this as a justifiable situation, and this is how most payday loans begin.