Debt Help Personal Finance

7 Superior Alternatives To Dangerous Payday Loans

Written by Hank Coleman

When money is tight, and you are struggling to find cash to pay your bills, too many Americans turn to payday lenders to help them stretch their paychecks or budgets to the end of the month. Many find themselves especially struggling when faced with a hardship and little to no emergency savings.

Recent surveys have shown that a majority of Americans, 60% to 70% live paycheck to paycheck. And, according to the Associated Press, nearly two-thirds of Americans earning between $50,000 and $100,000 would struggle to find an extra $1,000 for an unexpected emergency.

And, that’s where payday loans have come in and risen in popularity. It’s far too easy to succumb to the temptation of securing a payday loan. You hear how easy the loans are to get on the TV, over the radio, and in your email day in and day out. It’s a siren song.

Payday loans are typically small amounts for just a short period of time. It’s just enough money to tide you over until payday. But, it’s a quick fix that often masks underlying problems. And, in fact, it compounds those issues. Paying back a payday loan is not like other loans. In fact, it’s an entirely different story that’s attached to an exceptionally high interest rate.

Payday loans are an extremely dangerous and costly way to receive short-term financing to cover an unexpected bill or an emergency that snuck up on you. People often turn to payday loans when they do not qualify for traditional bank loans and other financing options.

Turning to a payday lender should be a last resort because of the enormous amount of interest that you will ultimately pay on such a short-term loan. Payday lenders provide a horrible service that preys on people who are struggling and allow you to roll short-term loans over with interest continuing to build. But, you do have other options if you need money in a pinch to pay your bills.

What Are Payday Loans?

You can find payday loans under many different names such as check advance, cash advance, payday loans, and the like. Typically, consumers are in financial trouble and think that they have very few options to turn to for short-term credit to pay bills or help in an emergency. Payday lenders fill the gap of short-term loans for consumers who may have poor credit or no credit and traditional bank loans are not available to them.

To receive funding, the payday lender electronically deposits an approved amount into your checking account, minus the fee they charge. You, in return, promise to pay the entire amount back on your next payday. At that time, the lender electronically debits the amount. If you need to extend the loan, then a fee is charged for each extension. Under the law, lenders of payday loans must reveal the APR and dollar amount in financing in the contract, but that doesn’t mean it’s obvious and not confusing – far from it!

The ensuing loan amount can get to be quite expensive. Suppose you need to obtain a loan of $150 until your next payday. You agree to borrow the amount and pay the loan company’s fee of $15. Then, you may have to extend the loan until after your employer pays you on yet another payday. Therefore, the payday lender tacks on another $15 to rollover the financed amount for two more weeks or until you receive your next check. When you include the APR, the lender could wind up charging you as much as $50 or more just to obtain a small $150 loan.

Why Payday Loans Are Bad for Consumers

When you take out a loan to pay for a new car, you easily understand the terms of your loan. You agree to pay a certain amount of money each month until you pay the balance in full. The loan includes a fixed interest rate that you also pay on top of the principal balance.

A payday loan is similar but different. The terms and rates for this type of loan are often confusing because a payday loan is typically for a span of two weeks, until your next payday. But, the interest rate that you think you’re paying covers just that two-week period of time and is not computed on an annual basis like we’re used to seeing when we see 4.5% APR on a car loan or 18% APR on a credit card. It’s like comparing apples to oranges based on what we’re used to seeing with credit cards.

For example, a typical two-week payday loan with a fee of $15 for every $100 borrowed equates to an annual percentage rate of almost 400%, according to the Consumer Federal Protection Board that regulates such loans. These interest rates continue to balloon if you renew your loan or take out a new payday loan as your old one expires in two weeks.

Alternatives To Dangerous Payday Loans

1. Pawn Shop

Pawn shops often have a bad rap in America. Consumers often associate them with the downtrodden or low-income citizens. But, for decades, pawn shops have bridged the gap for short-term loans when customers could not find loans through more traditional sources such as banks and credit unions.

Today, pawn shops have seen a resurgence in popularity thanks to television shows such as the History Channel’s Pawn Stars.

Pawn shops are very highly regulated businesses in the United States. They provide consumers with small loans against items of value, or you can simply sell the items to a pawn shop outright for immediate cash. If you pawn an item, you typically have 90 days to repay your loan with interest depending on your state’s laws. If you do not return to repay the loan, the pawn shop can then sell your item in their store or on the internet.

According to the National Pawnbrokers Association, an industry trade group, pawn shop customers typically borrow an average of $80 against the value of items when they pawn them. And, approximately 80% of borrowers repay the loans and retrieve their items.

If you are short of cash, a receiving a loan from a pawn shop can be a good alternative to payday loans and other predatory lenders.

2. Peer-to-Peer Lending

Peer-to-peer lending services such as Lending Club, Prosper, Kiva, and others provide the crowdfunding option for borrowers who banks might not otherwise approve for a loan. While you could typically pay a higher interest rate with peer-to-peer loans than using a credit card, the burden to vet applicants falls to investors.

With these services, you can typically borrow up to $30,000 over a span of three to five years. The Peer-to-peer lending platforms rate borrowers based on their credit score, history, and other factors to assign a degree of risk to the loans. If you’re are in a tight spot and need money, you may want to consider peer-to-peer lending as another option that you can pursue instead of even more expensive payday loans.

3. Credit Card Advances

If you don’t have an emergency fund or enough cash on hand to help you get through a rough patch, you can typically get an advance from one of your credit cards. But, keep in mind that these advances are typically a higher interest rate than your normal purchases.

Getting a cash advance from your credit card is a short-term solution. And, you should only use a cash advance from your credit card if you can pay off the advance in full by the due date.

4. Personal Bank Loan

You might want to consider turning to your bank for help if you’re in need of a loan. Depending on your credit history, credit score, history at the bank, and other factors, you may be able to borrow a small amount of money based solely on your personal guarantee of repayment. These loans are often called signature loans at banks and do not require you to provide collateral backing the loan.

While a loan from your bank may not be a viable option for some, others may be able to find a helping hand when they are in need by a collateral based loan or even a signature loan from their bank. It may way well be worth your time to stop by your local bank where you’ve done business with for years and have a brief conversation on the possibility of a signature loan.

5. Loans from Friends and Family

Another option that you could consider is asking your friends or family members for a loan. There is a danger in asking people you know for money, though. While a bank is unlikely to have an emotional investment in loaning you money, a friend or relative may be a bit more involved in the loan, and it could create a bad relationship if you don’t repay on time.

Dave Ramsey, the financial guru, radio host, and author of The Total Money Makeover is famous for saying that Thanksgiving dinner tastes different when you owe family members money. But, borrowing money from friends and family could be a better option than a payday loan if you and your loved ones are comfortable with it.

Daniel Lieser, co-founder of TrustLeaf, which helps with personal loans for small businesses by putting them in a legal document, says he recently borrowed money for a security deposit at a new apartment from a family member before he could get his old $2,800 security deposit back.

“I’ve always used loans from immediate family members, even though it usually feels awkward,” Lieser says. “I made it better by always paying back on time and later giving them a $25 gift certificate as a thank you, so they’ll be willing to lend me money again.”

Setting up and automatic repayment plan through your bank and writing the terms of the loan in a legal document or contract could make you and your loved ones feel better about the process of borrowing money from each other. And, it could go a long way to helping smooth over any potential hurt feelings and awkwardness before they crop up.

6. Borrow from Your Retirement Account

Many 401k retirement plans offer the option to borrow against your account balance. Most financial experts consider taking out a 401k loan as a bad idea for many reasons. You will lose out on the potential future financial gains that you account would have earned. For the live of your account, you will always have missing gains that you would have received if you had taken out a loan.

Additionally, you must continue working for your employer and make loan repayments, typically at a nominal interest rate. If you leave your job or get fired, you will own the entire loan balance at that time back to your 401k retirement plan. If you don’t pay the loan back, the IRS considers it an early withdrawal, and you would owe taxes and penalties on the amount you withdrew.

Again, like many of the options on this list, this is not an optimal solution to your financial problem. It’s one of many options that you have, and a 401k loan is cheaper in terms of interest charged than a payday loan. But, the loss of future of retirement income can be detrimental and far-reaching even years after you repay the loan.

7. Payroll Advance

Another option that may be available to you is taking a payroll advance. Many companies allow their employees to receive two to four weeks worth of pay in advance in times of financial hardship. You should check with your company’s human resource or payroll department to find out the specific criteria and guidelines for taking out a payroll advance.

One benefit of this option is that most payroll advances do not charge an interest payment, and you can typically pay back the advance prorated each month over the course of a year. One drawback though might be the stigma and questions that you may receive from your boss or employer about the financial health of your family and the circumstances that caused you to need an advance. You have to weigh these options when approaching your employer.

These alternate options to avoid a payday loan may not be right for everyone. Several of these options have long-term implications for you and your family’s financial future, and you should only consider them carefully. A few of these options are more expensive than others, and some have other social and career implications that you may want to consider. You should weigh each one carefully before applying for a loan, talking to your company’s human resource department, or discussing borrowing with your friends and family.

But, each of these seven options has one thing in common. They are all better options than taking out an expensive payday loan with rigorous repayment terms, short repayment plans, and high interest rates.

About the author

Hank Coleman

Hank Coleman is the publisher or the popular personal finance blog, Money Q&A. He’s also a freelance journalist specializing in retirement planning, investing, and personal finance. You can also find him on Twitter @MoneyQandA.

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