The reliance on payday loans in emergencies is a financial fallacy because such loans often come with obscenely high-interest rates, associated fees, and very short repayment periods. Relying on them regularly can lead to a cycle of debt, as you’d be constantly borrowing to pay off previous loans plus interest.
The appeal of quick money, especially in desperate situations, can be very compelling. Fear and urgency can cloud judgement, making it easy to overlook the long-term effects, such as the extensive loan costs and harmful debt cycle. We may also underestimate our ability to repay the loan in a short period, not accounting for unexpected expenses that might arise.
An appropriate financial practice, in this case, would be to build an emergency savings fund. This fund should ideally consist of three to six months’ worth of living expenses, set aside for unexpected financial difficulties such as job loss or medical emergencies. Sound financial behavior also involves living within your means, reducing unnecessary expenses, and identifying and rectifying poor financial habits.
Further Readings:
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“Payday Loans and Consumer Financial Health” by Neil Bhutta. Paper Link A research paper discussing the consequences of payday loans on consumers.
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“In Harm’s Way? Payday Loan Access and Military Personnel Performance” by Scott Carrell and Jonathan Zinman. Paper Link A research report about the detrimental impact of payday loans on military personnel.
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“Payday Loans”. Wiki Link This Wikipedia page provides an overview of payday loans, their structure, and criticism.
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“The Two-Income Trap: Why Middle-Class Parents are Going Broke” by Elizabeth Warren and Amelia Warren Tyagi. Book Link The authors offer an insight into why families might fall into the payday loan trap, alongside strategies to avoid it.