When people use payday loans, they primarily utilize the short-term, high-interest funds to cover a lighting bill, pay for an automobile repair or replace a broken down refrigerator. Although there might be a small number of borrowers who use it for shopping, a vast majority need the quick cash for financial emergencies and unforeseen events.
But, this year, many families are using payday loans for the wrong reason: Christmas shopping.
According to a new study from T. Rowe Price, a growing number of households are taking out payday loans and raiding savings accounts to ensure that they get everything their children want for Christmas and to show people that they are not an Ebenezer Scrooge when the holidays make their return.
The survey found that 25 percent of parents used a payday loan or withdraw from retirement or emergency savings accounts for Christmas last year. This is the worst thing you could for your net worth.
And most realize the errors of their ways. Nearly two-thirds (64 percent) felt remorseful that they spent more than they budgeted for; half concede they never meet their holiday budget.
Indeed, it does make sense that these people are using instant financing businesses because they are spending between $400 and $500 on gifts per child this year; most households in the United States, Canada or the United Kingdom are living paycheck to paycheck.
It isn’t just payday loans that parents are taking advantage of. They’re also pulling out their credit cards, whether it’s at the store or online. This isn’t any better because it takes three months to pay back.
You may personally scoff at these findings, but no one wants to be viewed as a Scrooge, says Marty Allenbaugh, a financial planner, who argues that you need to have a balanced approach.
“Between our inclination to be generous during the holiday season and the blockbuster retail deals, playing Santa can be kryptonite for even the savviest budgeters,” Allenbaugh told M2Now.
“But splurging a little shouldn’t turn into indulgence at the expense of financial well-being. Retirement accounts are meant to fund retirement. Emergency funds are meant to fund emergencies. Payday loans should be the last of last resorts. Nothing that comes wrapped in a ribbon is worth the consequence of bending these rules.”
Allenbaugh added that Christmas can come with a financial and an opportunity cost. This means that you can prioritize and make trade-offs, which can then teach kids important money lessons “that are missed if parents take an everything-or-bust approach to holiday shopping.”
Financial experts and payday loan businesses often warn that using a payday loan primarily for shopping is the worst thing you could ever do in both the short- and long-term. This is especially important for those who can borrow an immense sum of funds that are more than what they can afford.
Unfortunately, it’s these types of stories that are hurting the overall payday loan industry.
Critics argue that payday loans send borrowers into debt cycles and debt traps, but sometimes it’s the consumers who get themselves into pecuniary difficulties because they wanted to spoil their kids at Christmas time. The opponents are given more ammunition, while the proponents of this alternative financial product are left scratching their heads at the lack of personal responsibility.