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Should You Risk Your Paycheck on a Payday Loan?

Jeff Cuellar

Why is it that every time you want to save money, forces outside your control try to take it from you? Ok, maybe “take” is a little inaccurate. Let me make it clearer – your savings is a crumbling fortress that’s constantly being assaulted.


Fare hikes and CPF contributions are battering down the gate, MAS housing and loan regulations are scaling the ramparts, and inflation is catapulting boulders that’ll soon breach the wall. At moments like these, you’re probably thinking “what else could possibly go wrong?”

*The earth shakes* Oh yeah, those war elephants that just emerged from the breach – you can call that “holiday” spending… and Chinese New Year is upon us.

Hopefully, you’ve prepared for that expense. If not, you might be considering a payday loan. But before you put your signature on any agreement, understand what you’re signing and know the pros and cons of your decision.

What Is a Payday Loan?

A payday loan is a short-term, unsecured loan with a very high interest rate that people take to cover bills, rent, and other living expenses that can’t wait until your next payday. Typically, as long as you’ve got a job with a fixed monthly income, have a bank account, and aren’t asking for an unreasonable amount, you can get a payday loan.

It doesn’t work like a normal bank loan that advertises lending you 2X-3X your monthly salary. If you’re making $3,000 and you’re asking for $7,000 – you won’t get it. But if you ask for $1,500 you probably will.

You just need to leave a post-dated check with the payday loan provider for the amount borrowed plus the financing fees. The check will then be cashed by the lender as payment.

The Pros of Taking out a Payday Loan

Payday loans aren’t much different from any other loan you’d take out. The only difference is that it’s meant for short-term borrowing (2 weeks+, not 6 months) and must be paid back quickly.

As long as you follow the rules of paying what’s due, when it’s due, a payday loan can help you get through your temporary money problems.

Here are the pros of taking out a payday loan:

  • You Get Your Cash Fast: Unlike a bank, which can take days or more to process and disburse your loan, payday loans can get your cash in 24 hours or less.

  • You Deal With MAS Licensed Moneylenders: True, you can borrow money from unlicensed moneylenders (Ah Longs) for the same purpose. But unlike loan sharks, most payday loan providers are MAS licensed and follow strict lending guidelines. Plus, if you can’t make a payment, you don’t have to worry about them breaking your kneecaps or throwing red paint on your door.

  • Your Credit Isn’t Checked: The reason why it takes so long to get loan approval at banks is because they’re giving your financial background a cavity search. And with today’s stringent MAS rules on unsecured loans, its cavity searches for everyone! But payday loan lenders don’t put you through that… trauma.

These loans will still affect how much you can borrow from a bank if you want to take a bigger loan like a home loan. If you have different loans now and want to find out if you can afford to buy a particular home, you should definitely do a quick check first before it’s too late. Thankfully, there’s the new SmartLoans Loan Affordability Calculator to help with that.

The Cons of Taking out a Payday Loan

What do payday loans and going in for surgery have in common? Both require tons of caution, have very little room for error, and can be extremely costly! Because if you borrow more than you can handle and fail to pay the full amount owed, you’re going to pay a high financial price.

Here are the cons of taking out a payday loan:

  • You’ll Need to Pay Very High Interest Rates: You think credit card interest rates are high at 24% APR? Yeah, payday loans can be about that high… for the duration of the loan (2+ weeks remember?), not on an annual scale. That means if you adjusted your payday loan to reflect the APR interest rate, it would be upwards of 700% or more!

  • You Might Be Setting Yourself Up For a Financial Vicious Cycle: Let’s say you borrowed more than you should’ve, but you paid off your payday loan. Then mid-month rolls around and guess what? You need to take out another payday loan because you can’t pay rent, bill, etc. Then you end up borrowing more and more each payday loan and… I think you get the picture.

  • You Might Ruin Your Credit Score If You’re Not Careful: Just because your payday loan provider didn’t run a credit check doesn’t mean it won’t report late or non-repayment of your loan. Fall behind on your payday loan and it’ll wreck your credit the same as any other loan.

Final Note: Used wisely, payday loans can provide much needed financial “reinforcement” when your savings is getting pillaged by everyday expenses and bills. Used poorly, payday loans can put you in a state of financial slavery where your every available cent goes towards your creditors… including your payday loan provider.

Bottom line, keep this as an option of last resort (going to Ah Longs is NOT an option) if you need money. If you are thinking of taking a personal loan, you can always get help with the SmartLoans Personal Loan Wizard.

Have you ever taken out a payday loan, and if so, would you recommend them? Share your experience with us here!

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