Alternatives To Payday Loans: Which Option Is Right For You?
When you are strapped for cash, the promise of a quick and hassle-free cash payday loan can seem like an attractive option. But is it your only one?
The Center for Responsible Lending calls payday loans âpredatoryâ – for good reason. The ease with which borrowers can get their hands on funds to float them until their next paycheck often takes a heavy financial toll. Several states now cap interest on payday loans at 36%. However, according to the CRL, annual percentage rates can reach 664% in states without a cap.
Payday loans are problematic due to their high interest rates, but renewals pose an even greater danger. If you are unable to repay the loan on its due date, the Consumer Financial Protection Bureau warns that many states allow renewal of payday loans. In this case, you would only pay the fees owed on the loan as long as the due date is extended. You will then be billed for renewal or renewal, as well as any late fees, and you will still owe the initial amount. This is what leads to an expensive debt cycle.
The good news is that payday advances are not your only option if you are in financial difficulty. Here are some alternatives to consider.
Make a payment plan
For example, if an impending credit card or other loan payment compromises your ability to pay basic expenses, see if you can come to a deal. Many card issuers offer hardship programs that allow you to temporarily reduce or suspend payments if you are unable to pay. Alternatively, your issuer might agree to lower your interest rate to help make your payments more manageable.
If you’ve been a good customer in the past, your lender will be more likely to respond to your request. Either way, it’s best to be upfront about your situation.
Seek credit counseling
If you can’t come to an agreement with your creditors, try working with a nonprofit credit counseling agency. A certified credit counselor can set you up with a debt management plan, in which the counselor negotiates with your creditors to extend your repayment terms, lower your interest rates, and waive fees so that you owe less on one. monthly basis. You then make a one-time payment to the credit counseling agency each month, and they pay your creditors on your behalf.
A credit counselor can also help you budget, give you tips and tools to keep your debt under control, and provide you with additional training and resources to get your finances back on track. This way, you won’t need to borrow money to meet your basic expenses. These services are often free or available for a small fee.
Get a personal loan
While banks have a reputation for red tape and slow processes, you shouldn’t pass up your local financial institution when you’re in a rush. If you need money for a specific purpose, a personal loan from a bank or credit union could be a much cheaper alternative to a payday loan.
âIt’s more of a traditional loan deal, structured so that you get a sum of money to fund something that you need to buy or refinance, and you’ll have a repayment schedule,â says Andy. Laino. , a financial planner at Prudential.
But you are not limited to physical institutions. Online lenders like SoFi and Earnest let you see the rates and terms you qualify for without going through a rigorous credit check. While these options don’t offer same-day funds like payday loans might, some personal loan options can fund your bank account within days if you are approved.
They can also be a good option for borrowers whose credit is not so good. The lenders already mentioned, along with LendingClub, TD Bank, and others, are some of the best options for bad loans. Keep in mind that if you are approved for a personal loan with bad credit, you will be paying a much higher interest rate. However, it will still be a little lower than what a payday loan costs.
âPersonal loans are best used for debt consolidation, for people who have significant medical expenses or who know they will have home repairs at a fixed price,â Laino explains. “When you have more defined expenses or more defined projects, go for the personal loan.”
Tap your home equity
Homeowners may be eligible for a low-interest, tax-deductible line of credit, says Howard Dvorkin, personal finance expert and president of financial education company Debt.com. âFor those with a stable income, this can be a great way to access money quickly,â he says. Average home equity lines of credit interest rates are around 4%.
However, be extremely careful when leveraging your home for quick cash. âFor those with financial problems, tapping into their home equity puts their home at risk if they can’t pay off their debt,â Dvorkin said.
Get an alternative payday loan
Some federal credit unions offer a special product called an alternative payday loan, or PAL. These are short term loans intended to prevent borrowers from opting for high interest payday loans.
The terms of these loans are standardized by the National Credit Union Association. PAL I loans are available for amounts from $ 200 to $ 1,000, with terms of one to six months. The issuing credit union can charge a processing fee of up to $ 20 only, according to MyCreditUnion.gov. You must have been a member of the credit union for at least one month to take out a PAL I. PAL II loans are more flexible – they allow you to borrow up to $ 2,000, with a term of one to 12 months, and are available as soon as you become a member of a credit union.
Keep in mind, however, that alternative payday loans can still carry fairly high interest rates. Fortunately, PAL interest rates are capped at 28% by law.
Secure a cash advance by credit card
Relying on a credit card cash advance is never a cheap option, although it is probably better than a payday loan. Most issuers will charge a percentage of the advance as a fee, typically around 5%, with a minimum of $ 5-10. The average APR on cash advances is also around 25%.
The key is to repay the advance immediately, before the interest on the balance gets out of hand. Unlike purchases or balance transfers, interest immediately begins accruing on credit card cash advances. If you let the balance linger month after month, your short-term loan could escalate into a long-term debt problem.
Get a payday advance from your employer
An advance on your salary could be the answer to your short-term cash flow problem. Not all companies offer these types of loans, and terms vary. It is essential that you understand that the advance is in fact a real loan that you have to pay back on the agreed schedule.
Use a Paycheck Advance application
If you don’t want to involve your business in your financial situation and have a stable salary, you can use an app instead. Companies like Earnin and Brigit will pay you a portion of your next paycheck without any interest. Fees are limited, although some apps allow you to tip voluntarily.
Borrow from your 401 (k)
It’s possible to tap into another resource in the workplace besides your paycheck: your 401 (k). Although traditional advice requires you to run for the hills before you take any money out of your retirement account, a 401 (k) loan is a valid option if you are really stuck.
Borrowing on your 401 (k) is tax-free as long as you follow all the rules. This means paying off the loan on schedule or in full if you leave your employer. It also doesn’t require a credit check and you pay interest on your own account. As long as you pay off the loan within about a year, the impact on your long-term earnings should be minimal. Just keep in mind that your employer may not allow you to reassess your 401 (k) while you are paying off a loan. This could slow down your progress in growing a retirement nest egg.
Go to a pawnshop
Pawn shops offer secured loans without a credit check or lengthy application process. You can receive money on the spot by placing an asset as collateral. Once you have paid off the loan and any charges on the agreed maturity date, you get your collateral back. If you can’t pay off the loan on time, you lose any assets that you have pledged.
Keep in mind that the cost of borrowing from a pawnshop varies widely and is always higher than a traditional bank loan. Interest rates typically range from 5% to 25% per month (60% to 300% per year), depending on state law. Storage and insurance costs may also be included in the loan. The upside is that if you can’t pay it back, you can opt out without incurring new charges or a blow to your credit.
Use a peer-to-peer lending platform
Peer-to-peer loans can also help you get cash quickly by connecting you with an investor through a lending platform like LendingClub or Prosper. Investors on these platforms can review the available loans and select the one they want to fund. In return, the investor charges interest. You may also have to pay a small loan origination fee.
The interest rates on P2P loans can be quite low, especially if you have good credit. At LendingClub, the range is 7.04% to 35.89% APR. The application process is usually much less complex than at a bank. P2P loans also offer other advantages. âA peer investor can be nicer than a traditional bank,â says Dvorkin.
Ask family or friends
Finally, if getting into more debt due to fees and high interest rates is a real concern, consider turning to a trusted family member or friend for financial help.
This option can be difficult to navigate, but could be a good choice if it allows you to avoid the exorbitant interest and fees of a payday loan. Keep in mind, however, that borrowing money from a friend turns a personal relationship into a business relationship. You need to be comfortable with being beholden to that person, and the relationship could turn sour if you don’t stick to your end of the bargain. Your loved ones should only lend what they can afford to lose.