Dear Penny,
Last fall, my partner of four years had to miss work for several weeks due to a car accident and the death of a family member. He got a few payday loans totaling around $1,300 to make ends meet.
He had to postpone it several times and now the balance is over $2,500. He can only afford the monthly fee every month to renew it.
We have always kept our money separate and split the bills 50/50. My partner has not been irresponsible with money in the past. It was just a series of bad luck that brought him here.
I have $4,700 saved for emergencies. Should I use it to get him out of this nightmare? He didn’t ask me for help, but I just want to put that behind us and start fresh. It scares me to cut my emergency savings so much, but it seems like the right decision. Am I making a big mistake?
-Trap
Dear Trapped,
What your partner is going through is absolutely an emergency. Even though you haven’t merged your finances, you have merged your lives. So sooner or later it will also become your emergency.
Payday loans often advertise fees that seem reasonable, such as $15 for every $100 you borrow. But for a two-week payday loan, that translates to an APR of almost 400%. By comparison, even the highest credit card APRs are around 30%.
Exorbitant costs are designed to attract people, just like they have your partner. The Consumer Financial Protection Bureau estimates that 70% of people who take out a payday loan will eventually take out a second one within a month; about 1 in 5 will get 10 or more.
If your partner pays off their payday loans, the balance and fees will continue to skyrocket. Then it’s only a matter of time before he can pay his half of the expenses.
The odds of that money flowing out of your savings account — either to pay off that balance or to pay his share of the bills while he pays it himself — are pretty high here. So yes, I think it makes sense to stop the bleeding now and pay for it with savings to prevent the balance from growing any further.
Normally I’m a fan of don’t try to save others when you can’t afford to save yourself. I’m not in love with the idea of you cutting your emergency savings by more than half. But I also understand that when dealing with payday loans, you don’t have great options. You try to choose the least terrible.
I think what you’re seeing here is that it’s impossible to keep your finances separate when you’re combining lives with someone you love. Say your partner loses his job and can’t pay his half of the grocery bill. Would you tell him not to come near the refrigerator? The mine is mine, yours is yours approach just doesn’t work.
Once you’ve paid off that debt, your top priority is to replenish that emergency fund. He must contribute everything he invested in the loan into your savings each payday.
View emergency savings as a common goal. Continue to build this savings account until you have at least three months of living expenses. Sounds daunting, I know.
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But that’s a long-term goal. Try breaking down what you need for a month and then dividing that by 30 to calculate your average daily expenses. Your goal is to reach the equivalent of 90 days worth of invoices. Perhaps you can aim to save one day of expenses each week. By doing this, you would achieve this goal in less than two years.
What I want more than anything is for you to break away from payday loans for good. Using your emergency fund will stop the bleeding for now. But only preventive medicine – in the form of regular savings – will help you stay away from payday loans forever.
Robin Hartill is editor at Penny Hoarder and the voice behind Dear Penny. Send your tricky money questions to [email protected].
